The political economy of Covid-19
Titus Mbuya | Tuesday April 21, 2020 13:03
Both the United States and the Eurozone economies are expected to crash by 7.5 percent and 6.7 percent respectively in 2020. More than 22 million Americans lost jobs over the last five weeks since President Donald Trump declared a national emergency in that country. China is the only economy which is expected to experience positive growth at about 1 percent compared to the average of 6 percent in previous years.
Coming closer home, at the beginning of the year, the African Development Bank (AfDB) forecast a growth rate of 3 percent for the continent. Last week the IMF projected that the Gross Domestic Product (GDP) of Sub Saharan Africa will contract by 1.6 percent due to Covid-19. The South African Reserve Bank says that country’s GDP will contract by 6.1 percent this year.
Here at home, when presenting his budget speech in February, the Minister of Minister of Finance and Economic Development, Dr Thapelo Matsheka said: “The domestic economy is estimated to have grown by 3.6 percent in 2019, and to reach 4.4 percent in 2020, driven by faster growth in the service sector”. Hardly two months after the adoption of the budget by Parliament Covid-19 strikes setting the economy back which could result in negative growth for the country in 2020.
In the recent past the world has experienced two major depressions. There was the dot.com bubble burst in 2000, which was an upshot of overpriced stocks of high-tech blue chip companies. There was also the 2008 global economic meltdown which was a consequence of corporate greed in the financial services sector as exemplified by the collapse of Lehman Brothers Bank.
The global economy had just recovered from that shock and was on a sustained growth trajectory, and then b-o-o-m...Covid-19 strikes! The main difference between this one and the others in the past is that the current slump happened suddenly, without warning.
However, the most fundamental difference between this particular crisis and the previous depressions is that it discourages economic activity. For economic activity to happen human beings have to be up and about. The economy cannot function without physical contact and mobility.
Covid-19 requires social physical distancing and discourages crowds, conditions that are antithetical to production and consumption. What with rolling lockdowns and curfews around the globe which might become a feature of human existence even post Covid-19!
No country was prepared for the scale of the outbreak of the pandemic and how it affects all spheres of life. Covid-19 is not just a public health problem, it is a “whole economy” issue. The economy is a dynamic and innovative organism. You do not just shut it and open it. Covid-19 occasioned an abrupt end to commercial activity around the world. Shut downs, or lockdowns, result in reduced supply and demand, as incomes are lost. And it is going to take some time before the economy regains normalcy.
Due to the devastation that Covid-19 caused, and further damage that the pandemic can potentially do to the economy, we have seen countries around the world, big and small, rich and poor, alike, rush to the rescue of businesses and their people, especially the most vulnerable.
Most countries are treating the outbreak of Covid-19 as a disaster and this is evident from the speed with which they are deploying monetary policy measures and fiscal instruments to cushion their people from the shock visited on them by the pandemic. The raft of interventions undertaken by governments across the globe, are similar but vary in degree, depending on the size of the economy and the intensity of the pandemic.
The relief packages are being extended to businesses and households to keep them going. Some commentators have tended to conflate the relief measures with the conventional economic stimulus. The purpose of the relief packages is to stabilize and support the economy so that it does not take a nosedive. Unlike a stimulus package, the relief measures are meant to retain jobs that are already there, not necessarily create new ones.
The purpose of the relief measures is to keep the economy afloat as opposed to an economic stimulus package which refers to a coordinated effort to boost economic growth which would result in increased employment and spending. To this end the Ministry of Finance and Economic Development press statement entitled “Economic Response”, is on point when it states: “The Economic Stimulus Package post-Corona will be developed after six months to boost the economy. At the moment, the priority is containment of the outbreak of the virus to save lives”.
In response to the pandemic the Botswana government has established the Covid-19 Pandemic Relief Fund with a capitalization of P2 billion. In the Ministry of Finance and Economic Development (MOFED) Guidelines released earlier this month, it is stated: “In terms of the mitigating actions being implemented around the world, the objectives are generally to minimise the adverse short-term impact of the COVID-19 recession on firms and households, and to ensure that the economy is well placed for recovery when conditions improve”.
The government must be commended for the relief package that they have put together. There is no right or perfect package. Governments have to keep on trying this and that as they go for the next 12 months. And it would not be helpful to be ideological about the package. If implemented judiciously the relief package announced by the Government of Botswana would go a long way towards supporting household incomes and thus sustain demand.
The poor and working class, are the groups that are going to particularly bear the worst brunt of the economic fallout occasioned by Covid-19, at a personal level. Covid-19 has precipitated a job loss bloodbath. According to some reports more jobs have already been lost than the entire period of the global economic meltdown. It is the highest incidence of job losses since the Great Depression.
The International Labour Organization (ILO) estimates that just under 30 million job losses will be experienced by the end of the year. An African Union study predicts that 20 million jobs (both formal and informal) are at risk in Africa this year. Informal workers, who constitute over 60 percent of workers in developing countries, are the hardest hit by the pandemic. Most of these are people who eke out a living from day to day earnings.
Regarding mitigation of the effects of Covid-19 on workers the MOFED Guidelines state: “At household level, for people who lose their jobs or are temporarily laid off, or lose income-earning opportunities (e.g. small-scale traders), action should help to soften the blow of lost income and help them to meet financial commitments”.
In that regard the relief package provides for a 50 percent wage subsidy to firms so that they can retain employees. The guidelines are very clear that there should be no retrenchments, and hence the undertaking to pay half of the wage bill for three months. While the assistance that is being extended to workers is progressive, perhaps this is the time for government and Labour to rethink the whole regime of workers’ benefits in the country.
The question is what would happen if the pandemic continues beyond three months, which is the duration of the wage subsidy? Companies may have to retrench staff because their businesses may not have recovered to the pre-Covid-19 level.
The Unemployment Insurance Fund (UIF) as applied in South Africa, is instructive in this regard. Under the UIF arrangement an employee who loses their job due to no fault of their own, is entitled to claim for eight months. Workers can claim if their companies become bankrupt, contracts are ended, or are fired.
UIF is financed through a dedicated tax on the wage bill. Contribution is 2 percent of one’s monthly gross wage. This includes domestic workers. In response to Covid-19 the UIF in South Africa has developed a temporary employer-employee relief scheme to assist employers who are unable to pay the full salaries of workers sent home during the lockdown.
The assistance extended, by our government, to businesses, in the form of wage subsidy, debt holidays, tax deferment, and loan guarantee scheme, is also commendable. These relief measures will go a long way towards availing much needed cash-flow for businesses. Many businesses were already cash-strapped even before the outbreak of Coivid-19.
Some of them found themselves in that situation because government departments took long to pay them for goods and services provided. The directive made to government agencies, including parastatals, to pay service providers in the private sector within five days of delivery of invoice is a welcome development. This is important because the effects of Covid-19 on businesses are going to be felt for a long time to come. For business, in particular, the real pain is going to be felt four to six months from now. This is a scary thought given that most of the relief measures will last until June this year.
Government has also undertaken to mitigate the effects of Covid-19 on the poor and indigent through its existing social safety net especially in the form of food parcels for households that are in need. Covid-19 has exposed the rough underbelly of our society – the level of abject poverty that prevails in the Republic. Coupled with that the pandemic has laid bare the degree of inequality that bedevils this country.
Covid-19 has brought into sharp focus the reality of the grim figures that speak to the plight of the poor. According to Botswana Multi-Topic Household Survey published in 2018, our unemployment rate is at 19 percent; 16.3 percent of the population lives below the poverty datum line; and the proportion of those living in extreme poverty (below $1.90 or P20 a day) is 5.8 percent.
People are dying of hunger out there! And this is happening just outside Gaborone. The situation is worse in the “far flung” settlements of Ngamiland and Kweneng West. For many households the school-feeding scheme is the only provider of their meal everyday. With the schools closed because of the lockdown families are going to bed without food for days. Some of these families are child-headed households and they rely solely on food rations for their survival.
It is worrisome that the Ministry of Local Government and Rural Development, which is responsible for social security of the most vulnerable of our society does not seem to be treating the hunger that our people are experiencing with urgency especially during this time of lockdown. An accelerated programme to deliver food parcels for households should have been rolled out the same week that the lockdown was imposed. People are impatiently waiting at their homes, in vain, for bo-mmaboipelego to come to their rescue.
Last week minister Eric Molale, of Local Government, waxed lyrical on television about how they were ramping up their system in order to reach those in need speedily. The problem is that Molale’s officers do not even know who these people are and where they are. In the age of the 4th Industrial Revolution, the ministry should be able to optimize their systems in terms of maintaining a database of these people and integrate the database into the entire e-government system so that they have access to all the information about them in terms of where they live, how many they are in a household, etc.
That would make it easy to access beneficiaries during times of emergency like the one we are in right now. Over and above that the Ministry should seek assistance and tap into the social capital of the local communities, like ward leadership, village development committees, non-governmental organizations, councillors and traditional leaders. These structures have intimate knowledge of the families in their immediate localities, and they are generally, trusted by the people. Otherwise the much needed food, when it does come, will end up in the wrong hands.
If the Ministry of Local Government does not change its ways it will be accused of corruption and hence people will lose faith in the whole relief programme, or worst still, lead to social unrest. We have seen that happening already in some countries in Africa. But most importantly, inaction and procrastination will result in many people being malnourished and becoming even more susceptible and predisposed to Covid-19.
However, in my own estimation the most glaring gap in the entire government relief package, as a response to Covid-19, is redress of the plight of the small trader especially in the informal sector. One hopes that the omission is not a betrayal of government’s attitude towards micro, small and medium enterprises (SMME’s).
As stated above the primary function of the steps being taken is to allow as many businesses as possible to keep on trading. The purpose of the relief package is to assist businesses that are experiencing financial challenges as a result of Covid-19. And this should apply across the board.
In Sub Saharan Africa over 75 percent of SMME’s are in the informal sector. These are small businesses that are not licensed and have not registered for tax. Some of them do not even have bank accounts. They include hairdressers, barbershops, vendors and hawkers selling fruits and vegetables, food, airtime, sweets, and cigarettes. There are also artists, taxi operators, as well as self-employed artisans who “hustle” for piece jobs, etc.
It is the owners of such businesses who are the hardest hit by the fallout from Covid-19 on the economy. Most of small businesses may never come back. A substantial proportion of them is owned by single mothers, and young people, who do not have any other source of income. The little that they make everyday from their sales enables them to put food on the table for their families. Suddenly their only source of income is shut down, for no fault of their own, without warning. Indeed, for the poor, coronavirus is taking away the only thing they had that gave them dignity – a job!
The government’s “Covid-19 Economic Response”, also known as the Relief Package, does not address the plight of the small businessperson. People in the informal sector do not know where to go for help. Most of them cannot benefit from a wage subsidy, debt holidays, tax relief or the loan guarantee scheme. There is no structure or framework for them to access these schemes. These are small businesses which do not affiliate to any association. They are on their own. The government does not have them anywhere in their system.
If government is genuine about restoring the livelihoods of the people where they were before Covid-19 until the economy recovers, then small businesses should benefit in the form of cash transfers, ranging from a stipend in the region of P2, 000 a month instead of giving them food parcels. These are people who were exchanging goods and services for cash and hence such cash transfers would be an appropriate relief for them to keep going. Some of them have rented space and pay bills for utilities such as electricity and water. The government should bail them out in that regard as well.
The question arises again, how will government identify them because most of them are not in the system? This is where the social capital of community structures at ward level comes handy again. The dikgosana, village development committees, and councilors know these people. Most importantly the people generally trust them and they will be more disposed to cooperate with them.
Last but not least, government should urgently consider an incentive package for the people on the frontline in the fight against Covid-19, namely health care workers and first responders. At the very least such package should last for the next six months when the intensity of the virus may have abated. The package could be in the form of free medical aid, an allowance of 10 to 15 percent of their gross earnings, tax concessions, for example, waive pay as you earn (PAYE), and free electricity and water.
This is necessary to keep these workers’ morale high given the conditions they are working under where even such basic things as protective gear are in short supply. These are people who leave their families everyday to put their own lives in harms-way to save our lives. Without a doubt the nation owes them a huge debt of gratitude.
*Titus Mbuya is the Managing Director of Dikgang Publishing Company. He writes in his personal capacity