The Great Lockdown: Managing the economic impact in the less developed countries

The Daily Star |
June 07, 2020 |

Wahiduddin Mahmud –

Remarks made in response to the keynote presentation by Professor Gita Gopinath of IMF and Harvard University at the virtual workshop organised by the Centre for Economic Policy Research, London, June 4-5, 2020.

The social distancing measures to contain the spread of the Covid-19 infection have been appropriately called the Great Lockdown, in remembrance of the Great Recession of the 1930s. It needs no elaboration that this health crisis and the associated social distancing measures have imposed an enormous economic burden worldwide, but more so on the less developed countries, in terms of employment and production losses and the hugely increased demand for social security measures. Compared to the developed countries, the less developed ones are obviously more hard-hit in terms of economic misery of the large proportions of their populations who already live below or near the poverty line and who are now joined by numerous others who have lost their livelihoods because of the lockdown.

There is a lot of discussion in the context of these countries, about how to balance between measures to save lives or livelihoods. The reality is that providing for the minimum sustenance of the poor and keeping them home for an indefinite period may prove simply beyond the resources and the logistical capability of the authorities. Cross-country comparisons show that the poorer countries are lifting or relaxing the lockdowns and social distancing measures earlier, perhaps prematurely, in relation to the time of the initial infections. A few countries, notably Vietnam, are exceptions in containing the spread of the disease early enough so as to be able to safely return to normal economic activities.

The challenge is how to live with Covid-19 while maintaining some measure of safety to slow down the spread of infection as the economy gets restarted. The problems is that, there is not enough testing or epidemiological analysis to plan for a sequencing of such easing of restrictions, except following what other countries are doing, which is of course not the best idea. The bottom line is that if infections continue to spread fast with large numbers of deaths, there may be so much panic and disruptions that the choice between lives and livelihoods will no longer remain meaningful.

A particularly disappointing aspect of the onset of the Covid-19 crisis is that it took place at a time when many of the less developed countries were showing signs of strong economic growth momentum. There may, however, be a silver lining. Crises and shocks expose many structural weaknesses of the economy, which are not paid much attention to when the going is good. Several areas of such weaknesses can be readily identified.

First, the lack of representative credible local governance is always a problem in implementing social security measures and local development plans, resulting in huge resource leakage and mistargeting of beneficiaries; but the problem is now all the more acutely felt when many countries have to rely on the centralised bureaucracy with very little local knowledge to manage things during the lockdown. No wonder, the Indian state of Kerala, known for its strong local governance, has proved a model for coping with this crisis by implementing effective lockdown, infection tracing and delivery of social security assistance.

Second, the weaknesses of the commercial banking system in many of these countries with huge portfolios of non-performing loans are well-known. The problem is now starkly exposed as governments are trying to implement the huge stimulus packages through the banking system. Many enterprises need to be given flexibility in loan repayment, which is to do with the immediate liquidity problem and is relatively easy to implement; but some also need loans at concessional interest rates to cover loss and avoid bankruptcy. Even if the loss of interest earnings of banks is to be covered from the government’s budget, assuming that fiscal resources permit that, monitoring is a huge problem. The recourse is to open refinancing facilities from the central bank at zero or very low interest, which is equivalent to printing money.

A related, and a more important issue is how to assist small enterprises to tide over the crisis and save them from winding up, particularly since they lack effective political lobbies to attract the government’s stimulus funds. Yet, small enterprises, some of these scaled up from the subsistence scale and others set up through lateral entry, are extremely important for providing employment, for making growth more equitable and for making the economy more resilient in the face of impending problems with remittance and exports amid a prospective global economic recession. Although in many developing countries we see much dynamism in the small-scale sector in terms of net growth in the number of enterprises, what is hidden is a lot of churning in and churning out. These enterprises typically need small amounts of working capital, which they may have lost due to the lockdowns, so that a little help can make the difference between bankruptcy and remaining afloat. Some countries may be in a position to use the agent banking window of commercial banks or microfinance institutions as vehicles for the delivery of easy loans. These institutions may now prove all the more useful in financing the informal sector enterprises.

A third area of structural weakness, which has become too visible, is of course the extremely weak structure of the health system in many less developed countries, often characterised by very low public spending on health, along with weak governance of service delivery. Some countries, Bangladesh is foremost among those, have earned plaudits for increasing the average longevity of the population, mostly by reducing child mortality; and that has been achieved mostly through low-cost solutions and effective social campaigns, such as for child immunisation, or diarrhoea treatment by oral saline. Such public health campaigns have largely bypassed the government’s regular health establishments. Coping with the Covid-19 crisis has now exposed how fragile and inadequately equipped the health infrastructure is in many of these countries.

Looking at the future, another related challenge will be posed by the increasing health risks from environmental degradation and pollution associated with urban and industrial concentrations, particularly in the densely populated countries. Increasing incidence of mid-life morbidity and mortality resulting from environmental pollution may already be eroding into the gains in average longevity from reduced child mortality. Incidentally, environmental pollution is also related to increased incidence of respiratory illnesses that make people more prone to fatal Covid-19 attack.

There are other areas of policy reforms that may be initiated in the wake of this crisis such as in respect of revenue mobilisation, restructuring of import tariffs or exchange rate management. The need for revenue mobilisation has come to the fore in light of the need for increased public social spending both in health and in education and training; the latter for coping with the need for creating more and new kinds of jobs. Then, the likely impact of impending global recession on remittance and export earnings may compel policymakers to rethink the strategy of unduly defending the domestic currency, while creating enclave-like arrangements for one or two major manufacturing exports amid a general anti-export bias. While these countries will need a lot of assistance from the multilateral and other donors to cope with the post-Covid-19 economic recovery, such assistance needs to be aligned with these much-needed policy reforms.

Wahiduddin Mahmud is Chairman, Economic Research Group, Dhaka.