Building Forward Better

The on-going pandemic is adversely impacting developing countries disproportionately, especially the poorer countries. Economists Jomo Kwame Sundaram and Anis Chowdhury consider actions for economic relief, recovery and reform.

The COVID-19 crisis clearly threatens both health and livelihoods. What’s more, the adverse effects of the crisis also spread, through trade as well as credit, to other countries, firms and households. Almost 2.7 billion workers, which is over four-fifths of the world’s workforce, now work and earn less due to the recession, with those in lower middle-income countries prone to bigger losses.

Saving Lives and Livelihoods
Globally, almost 1.6 billion in the informal economy – including the worst-off ‘casual’ labourers and petty, mainly family businesses, using unpaid family labour – have been hardest hit by the ‘stay in shelter’ lockdown measures. The axiom is, the longer the lockdowns, the greater the economic catastrophe. Both the pandemic and contagion containment efforts have threatened business operations and decision making. The design of measures matters, crucially affecting likely effects.

Early stimulus packages assumed that the ‘pandemic shock’ would be short-lived and easily reversible. In the past year, governments have adopted various monetary and fiscal measures to sustain as well as revive economic activity. These measures include extending social protection, cash transfers to households, temporarily deferring tax payments and lending more to businesses. While postponing tax payments may help, it tends to benefit the better-off who are generally liable for more tax, rather than those most adversely affected or in need.

In short, to counter this, governments of developing countries must do much more to help revive and sustain economies and livelihoods to prevent COVID-19 recessions from becoming protracted depressions. The government effort must extend to addressing the unsustainability, inequality, instability and other problems of extant economic, social as well as ecological arrangements.

Livelihoods Disrupted
The thing to remember is, business disruption has broader implications. It threatens the entire economy with long-term costs. Furthermore, if relations – such as trust among entrepreneurs, workers and customers – are disrupted, they’ll need to be rebuilt, and this requires time as well as expense.

Conventional economics ignores ‘transactions costs’ incurred in recruiting workers, seeking as well as keeping clients and customers, obtaining credit and investing capital, building trust as well as other relations, and thus, is a poor guide to policy. Ideally, the adverse effects of livelihood disruption should be minimised and income maintenance policies need to help fired workers as well as those whose livelihoods have been greatly diminished. In fact, even novel social protection measures are needed. For example, idle workers should immediately receive special social protection, while staying formally employed.

Here’s where direct and simple payment systems help. Without question, protecting livelihoods and helping businesses survive, along with enforced suspension due to lockdown measures, are both needed. Businesses, especially smaller ones with fewer reserves, need help to avoid liquidating and continue paying their employees. Taking such measures minimises rehiring costs when work resumes, but shouldn’t excessively burden employers with debt. However, this is easier said than done. The challenge will be to implement fairly, with minimal abuse and within the means available to governments.

Needed Interventions
Interventions, such as governments helping absorb the costs of public health measures to contain the contagion, are needed. This will not only help alleviate economic hardship faced by households and businesses, it’ll also minimise lasting damage to the economy while contributing to economic recovery. Without appropriate government measures, output will collapse due to enforced business disruptions leading to massive layoffs. Therefore, timely government interventions can prevent unavoidable recessions from becoming longer lasting depressions.

Since there’s no likelihood of simply returning to the status quo ante, government support for recovery also enables guidance for needed reforms to enhance prospects for sustainable development. Rather than ‘build back better’, governments must strive to ‘build forward better’.

Even when no longer operating, business maintenance and employee welfare need to be prioritised. There are a few, mainly developed countries which have acted promptly to minimise layoffs, avoidable business destruction and worker welfare losses. Governments should also adapt to emulate how American bankruptcy law enables businesses to continue operating to work themselves out of temporary predicaments.

A Last Resort?
In March 2020, Berkeley economists Emmanuel Saez and Gabriel Zucman proposed governments help ease pain and disruption with ‘payer-of-last-resort’ programmes. The proposal required adversely affected businesses to report unavoidable monthly overheads, maintenance and wage costs to qualify for government aid. Therefore, a government ‘payer-of-last-resort’ can help ‘suspended’ businesses to continue paying unavoidable bills to avoid insolvency, on condition of keeping their involuntarily idle workers, instead of firing them.

‘Payer-of-last-resort’ programmes can be effective if well complemented by effective contagion containment measures, enabling early resumption of business operations. Such a programme would not only reduce hardship, but also help businesses to temporarily suspend or scale down operations, limit haemorrhage as well as avoid insolvency and pick up quickly as conditions improve. What’s more, it would maintain cash flow for families and businesses, minimising the shocks’ adverse impacts on demand, such as due to fired workers spending less on consumption, while enabling rapid recovery as demand resumes.

Government spending, while unavoidably high due to the pandemic, can be financed by greater domestic borrowing enabled by central banks. This can be managed, especially with international economic solidarity and support for poor countries through existing multilateral institutions.

One Size Cannot Fit All
One thing’s for sure, economies aren’t homogenous, monolithic or unchanging. No single inflexible policy can possibly be suitable for all. As recessions are uneven in impact, various sectors, industries, services and businesses are affected differently. COVID-19 slowdowns are also unlike other past recessions. Many businesses may not be able to survive enforced stoppages and protracted demand collapses, even if temporary. Such businesses could go bankrupt, severely affecting related enterprises as well as all those directly and indirectly employed.

Much has to be learnt quickly ‘by doing’ and from other experiences, both positive and negative. Although, some businesses and sectors may not be able to survive, survival options should include business redeployment, infrastructure and facility repurposing as well as staff retraining. Conditions should be strict enough to deter abuse, but not participation. Strict verification and correction can wait, even until after the worse is over. For example, government grants or subsidies, later found to be excessive, can be converted into low interest loans that governments recover later, rather than treated as criminal fraud.

Inadequate Support
Clearly, many businesses need help to survive in these troubled times. Governments have provided liquidity, usually by offering low-interest or interest-free loans, to help businesses and workers survive crises. However, such measures only ‘smoothen’ debt burdens over longer periods, delaying or postponing ‘pain’, without ameliorating victims’ economic losses.

Temporary partial compensation for income losses based on need can enable businesses to quickly resume operations after lockdowns end, rather than contend with greater debt burdens. Aid is typically provided conditionally, for example, to avoid or minimise employee retrenchments. But little would be gained from deploying scarce resources to businesses unlikely to ever recover.

Although policymakers typically insist on means-testing for anti-poverty programmes, they rarely demand targeting for businesses, reducing the efficacy of government relief. All too often, without some ‘easy’ targeting of needy businesses, inevitably benefiting some who are not needy, too little is available for those in greatest need. A developed social protection system can help retrenched workers, but this is rarely available in developing countries.

The reality is, the most vulnerable are more likely to be displaced by lockdowns and less able to earn a living from home. To help, government unemployment benefits can be made progressive, with a higher fraction of previous earnings for the more needy.

Fiscal Space Crucial for Recovery
The fact is, almost half of low-income countries were already debt-distressed or at high risk before March 2020 when the WHO declared the COVID-19 pandemic. Limited fiscal space has constrained developing countries’ relief, recovery and reform measures, rendering them far more modest than those of wealthier developed countries. Nevertheless, their government debt ratios rose faster in 2020. Many emerging markets have taken on more debt, largely on non-concessional terms from private lenders and non-Paris Club members. Government debt in these developing countries has thus surged to levels not seen in over half a century.

From January to October 2020, the average debt burden of developing countries increased by 26 per cent as tax revenues declined sharply. The International Monetary Fund (IMF) projects their average debt ratios will rise significantly in 2021. But debt burdens limit available fiscal resources as well as policy space needed to better address the pandemic health and economic crises. Such debt is particularly debilitating in the least developed countries, where healthcare services were bare, even before the pandemic.

Relief, Recovery, Reform
Regrettably, we now face avoidable delays in vaccinating the world as intellectual property profits and vaccine imperialism block achieving ‘herd immunity’, especially in the poorer developing countries. As countries prepare for recovery, they should ask what recovery can and should mean. Recovery should not mean a return to business as usual. The unsustainable, financialised and grossly unequal pre-COVID-19 economy needs to be fundamentally transformed for sustainable development to be achieved.

COVID-19 policy responses have rarely addressed deeper prior malaises, such as stagnant or falling productivity growth and declining labour remuneration, not to speak of sustainable industrial policy measures to address global warming, resource exhaustion and other sustainability problems.

Main photo by Long Phan on Unsplash.