Addressing The Economic Fallout Of Covid-19 Requires Creative Solutions

Share this blog

Asif Saad analyses the pandemic’s impact on employment in Pakistan and the complexities that policymakers should consider as they deal with a major economic downturn

As the days go by, life in the times of coronavirus can seem unending. Even as the pandemic has raised fundamental issues about our priorities, it is important to consider the impact on livelihoods without looking at the matter as a ‘lives versus livelihood’ choice.

The economic fallout seems to be one of the biggest shocks in decades. When the economy is shut and businesses, both large and small, don’t have much revenue, they have no choice but to try and survive by cutting costs. The biggest fixed cost in business is the workforce and is thus a default prime candidate for cost cuts. No one likes this and it should be the last resort for businesses, but reality checks are important and businesses who are fast running out of cash will be unable to keep their workforce intact for too long. It is therefore important to look at the developing scenarios on this front.

Two things are likely to happen immediately. First, we should expect to see pay cuts being put in place by several businesses with immediate effect. We have already seen this begin to happen with pay cuts in the range of 30-50% being implemented in many companies in April. Most businesses will refrain from doing anything further through the month of Ramzan. But unless there’s a miraculous turnaround, we would expect to see larger number of layoffs starting June. From there on it’s just anybody’s guess what levels of unemployment will be reached. Pakistan Institute of development economics (PIDE) estimates new unemployed to reach 12 to 18 million!

So how do we deal with this? The policy response needs to encompass both urgency in the short term as well as long term economic restructuring. First, in the short term (six months to a year in my opinion), in addition to allowing the economy to carefully restart, we have to find ways to distribute as much cash as possible to those in need.

The operative words here are “those in need”. Here, the biggest challenge is to find the people who will face the brunt of the financial collapse. The government’s Ehsaas program is a good initiative which will hopefully have an impact at the lowest income levels. However, it will not be the game changer in the current situation, simply because it aims to support those at the lowest income levels, a large proportion of whom were already beneficiaries under the BISP program as well as countless other charitable organizations.

In the developed world, governments are able to extend unemployment benefits due to the fact that most of workforce is registered in one form or another. It is thus not difficult to identify the furloughed or laid-off workers, and once the government decides to distribute funds, it can reach the impacted people and ensure their survival.

However, in Pakistan where most of the economy still operates in the informal sector this is a major issue. There are no official workforce counts except for the tax paying businesses, which are relatively fewer in number. Even among taxpaying businesses, many do not show a proper count of workers within their organizations, while most private businesses still pay a large portion of their wage bill in cash. The absence of unions in the private sector also means a large number of workers go unrepresented.

Whatever the limitations, in the immediate and short term, the only way forward is for the State to identify the most impacted segment of the population and support them for as long as it takes for the economy to restart.

A starting point could be FBR and its provincial counterparts developing citizen’s lists based on employment status. The private sector could be required to provide proper count of their workforce, including management staff, to be verified by local governments. This will be laborious but in the absence of anything else, it is the probably the best place to start. The private sector has a big responsibility — this is the time to rise to the occasion and speak the truth about their employment and compensation levels. The tax man needs to be directed to not persecute those who have hidden facts in the past, similar to amnesties provided to investors.

Resources need to be found to fund this activity. Fiscal space does not matter at this point. The bigger danger for Pakistan is the government managers not spending enough because of their attachment to predetermined economic formulas. The pandemic has rubbished most of these anyway. We can return to them when the situation normalizes.

Once the short-term survival strategy is put in place, policymakers need to take a long, hard look at how the structure of the economy is likely to change in the medium to long term. To start with, they need to ascertain which part of the economy is unlikely to return in the post pandemic world.

It is now time to make some intelligent projections about economic restructuring. While there can be various estimates using different assumptions, one thing is clear — the economy will shrink and operate at reduced levels for many years. A simple way to think about this is to consider your income to have reduced by 50% (my assumption) and now look at how to survive. Basically, in such a situation, demand for non-essential items will diminish as we try and ensure that we cover essential needs like food, housing, utilities, healthcare and education. All other expenditure heads, including administration and security, need to be questioned.

Approximately 40% of Pakistan’s workforce is in the agriculture sector, according to the World Bank, while 60% is in industry and the services sectors. With the former least likely to be disrupted now or in the near future, it is the latter that is likely to be most threatened by the significant reduction in economic activity.

Here are some specific trends which are already visible:

The largest employer in Pakistan’s manufacturing sector is textiles with approximately 40% of the manufacturing workforce. This primarily export-based industry relies upon US and European markets for its revenues. Given how things are developing in the western world, it is difficult to envisage a full recovery of the retail sector in the foreseeable future.

Even when things do normalize, buyers are likely to try and reduce sourcing from overseas as they need to create manufacturing jobs within their respective markets. This means that Pakistan, along with others like China, Bangladesh, India etc, are likely to see a reduction in exports of textiles, and a corresponding reduction in manufacturing activity. Pakistani producers will need to carefully assess their options and perhaps evaluate other markets and product lines as they struggle to maintain operations.

A major portion of the labor deployed in the manufacturing sector, having migrated from rural areas in the last few decades, occupies low lying urban areas or slums. For many reasons, there is a case to be made to de-urbanize Pakistan. While this may look like going backwards by a few decades, it may actually be an opportunity to reset the shape of the economy. This can be done by providing matching income and opportunity levels in the rural areas. A shift back to the village is difficult to conceive but if the government can reimagine agriculture as an industry for the future, this could be possible via public and private investment in agriculture.

Another major trend which is unsustainable in the post covid-19 world is the retail and associated real estate and service businesses which have formed a large part of the urban economy-particularly in the last decade. These fall in the non-essential part of the economy where, as mentioned before, we should expect demand to nosedive. Urban centers like Karachi, Lahore, Islamabad and others employ large numbers in these sectors who will need to be directed to other areas.

Fortunately, the pandemic has turbocharged the online and virtual economy which is set up well to replace them. As bricks and mortar businesses are threatened, the service sector workforce, mostly young enough to be trained in the use of technology, can shift their services to online shopping, food delivery, call centers, online education etc.

Similarly, the post-Covid-19 world will be difficult many businesses engaged in the gig economy which had grown fast in the last few decades. The business models of services where technology was being used to share physical space, whether cars or homes — Uber, Careem, Air BnB — have been badly shaken by the pandemic. Frankly, I do not see these business models surviving. Unless these companies can quickly remodel themselves, they will not be able to make it in the post-pandemic world. On the other hand, technology which reaches its customers directly in their homes — entertainment services like Netflix, workplace substitutes like Zoom and gaming businesses like esports as well as others, are likely to be the main beneficiaries in the future.

In order to save employment in Pakistan, policy measures must be directed in the short term to identify and support the newly unemployed. In the longer term, make a gradual shift to sectors where demand remains robust and is likely to gain from the lifestyle changes taking place.

The advantage of a young population ought to be their adaptability and resilience to the new world. We can hope that a better world emerges from the pandemic disruption, but this will not happen unless governments plan and redirect the shape and structure of the economy.

Post a Comment