Setting aside temporary orthodoxy and fiscal deficits, the policymakers around the world are taking or mulling measures to provide relief to troubled firms and protect jobs, wages and people’s livelihood hit by the coronavirus-driven health and economic crises. That is currently thought to be the appropriate response keeping in view that most economies have been hit by evolving supply shocks as well as demand shocks, precipitated by the global reach and impact of the pandemic.
It is also recognised that emergency measures are required to prevent the current economic downturn turning into a prolonged and deep recession. The global financial crisis of 2007-08 was quickly resolved by conventional wisdom and prompt international cooperation. However, it delivered a fragile global recovery fuelled by unsustainable debts, resulting in unparalleled income and asset inequality within and among countries.
The huge income disparities between the rich and the poor turned growth into a major challenge for policymakers. Coming as it does with the world embroiled in multiple structural imbalances, the current crisis seems to be much more serious than the one witnessed over a decade ago.
Stressing the need for developing countries and emerging markets to provide sizeable support to affected people and firms, the International Monetary Fund (IMF) says: “wage subsidies for businesses affected by shutdowns can help prevent cascading bankruptcies and massive layoffs that will have lasting effects for future recovery and negative impact on aggregate demand. Cash transfers to low-income households can support consumption and preserve minimum living standards.”
The Fund’s advice is to balance cushioning growth with tackling external pressures, including commodity shocks and capital flow reversals
The Fund argues that broadband stimulus and easing of monetary policy can help support aggregate demand. The State Bank of Pakistan has slashed its policy rate twice within just seven days, from 13.25 per cent to 11pc this month.
The Fund’s advice to policymakers is to balance cushioning growth with tackling external pressures, including commodity shocks and capital flow reversals. Stating that the world is heading towards a recession, the IMF President Kristalina Georgieva noted that $83 billion has flown out of emerging markets since the beginning of the outbreak of the pandemic and 80 countries have approached the Fund to cope with its consequences.
Bank of America’s economists’ team says the US economy has entered what they see as a two-quarter recession. Others disagree, they think that the recession would last three to four quarters. Similarly, there is a general perception that recovery in Europe would take about a year. The IMF chief says the recession may be worse. It will all depend on how soon the health crisis is resolved as the virus is still spreading.
In the current scenario, Pakistan has no option but rely on domestic consumption for economic growth. At its recent peak, domestic consumption contributed 90pc of GDP but was heavily dependent on the import of foreign goods and services. The solution lies in developing import substitution industries. Here, the State Bank’s Rs100bn facility at a concessional rate of 7pc for promoting investment in manufacturing, coupled with the stimulus for businesses announced by the prime minister, may help.
Announcing relief to the people and stimulus to businesses, Imran Khan said that: “we (governments) take decisions keeping in mind the elite class, we do not think about the underprivileged; good quality facilities are availed by the elite while the poor suffer.”
It may be pointed out that the focus on extending relief simultaneously to both households and firms is a policy tilt to better balance demand and supply of goods/services and has the potential to minimise the gap created by scarce jobs for the huge surplus of labour.
Presenting different scenarios, a study by the International Labour Organisation (ILO) estimates that the pandemic could make another 25 million jobless on top of the 188m registered unemployed in 2019. This will have far-reaching impacts on labour market economies.
Reduction in access to work will mean large income losses for workers, estimated between $860bn and $3.4 trillion by the end of 2020. Depending on how quickly and with what level of coordination governments react, it was assessed that even in the best-case scenario, 5.3m more people will be pushed into unemployment.
Though relief measures stipulated in the Rs1.3tr package by the prime minister are steps in the right direction, a major problem is how they can be effectively implemented. There should be no intermediaries in the disbursement of money to labour and the vulnerable. The package will be supported by $600m committed by donors and lenders in the shape of both grants and loans.
In Belgium, quite often, company employees are called by managements to work in factories part-time, depending on the labour strength required to execute supply orders in hand. Thus, the number of days the factories operate in a 5-day working week varies. But the government there has taken up the responsibility to pay employees when factories are shut.
In the current crisis, office staff will work for four days instead of five in a week without any cut in salary under a similar arrangement, says an executive of a leading Belgian multinational. Only the services of temporary contract workers have been terminated. Policymakers in Islamabad need to look at such practices in Europe to draw upon their experience.
Among other measures, the PTI government has decided to allocate Rs200bn to provide relief to the labour force and Rs150bn to families most vulnerable to the virus. The stipend for poor families has been increased from Rs3,000 per month and prices of petroleum products have been reduced by 15pc.
Keeping in view the current situation, the Ministry of Planning, Development and Special Initiatives organised a seminar on ‘Creating Gainful Employment Opportunities’ which was attended by ILO representatives, academicians and government officials.
Highlighting suggested measures by participants, Nadia Hussain, an official of the Planning Commission, summed up as follows: policymakers must incorporate in the next budget the digitalisation need of every sector of the economy to boost not only GDP but create jobs for youths while imparting required skills particularly for dropouts of rural schools.
Sally Maitlis, a professor of organisational behaviour at Oxford University says “I think certain aspects of work and organisation will change for good through the current situation.”
Published in Dawn, The Business and Finance Weekly, March 30th, 2020