The Covid-19 pandemic has resulted in an unprecedented rise in poverty in Bangladesh in a very short time span. The South Asian Network on Economic Modeling’s (SANEM) household survey in November-December 2020 indicates that the poverty rate in Bangladesh increased from 20 percent in 2019 to 42 percent by the end of 2020. There is no denying that the decade-long success in poverty reduction in Bangladesh is under threat.
There are a few reasons behind the sudden and unprecedented rise in poverty in Bangladesh. First, the lockdown during March-May 2020 and the disruption of economic activities since the onset of Covid-19 resulted in unmatched havoc in the economy. This havoc created a large labour market disruption as many people either lost their jobs or earned less. Although the lockdown has been discontinued since June 2020, economic activities are yet to return to normalcy. Two rounds of SANEM’s business confidence survey of firms from major economic sectors in Bangladesh in July and October 2020 showed that the majority of the firms held the view of a slow economic recovery.
Second, Covid-19 also registered distressing effects on export-oriented sectors. In 2020, the dominant export sector, the readymade garments (RMG) industry, saw an unprecedented fall in export earnings by 17 percent. Recent surveys suggest that a large number of workers in the RMG sector also lost their jobs. Most other export sectors have also been negatively affected.
Third, despite that the official remittance inflow surged in 2020, SANEM’s household survey showed that more than 80 percent of remittance-recipient households reported receiving less remittance during this period. This phenomenon indicates the possibility that the total amount of inflow of remittances, channelled through both formal and informal means, might have declined during most months in 2020. Informal channels of remittances remained clogged during the pandemic, and the demand for informal remittances also fell due to sluggish trade and tourism activities. All of these contributed to the sudden rise in poverty during the early months of the pandemic. Also, a high poverty rate persisted even by the end of 2020.
There are two pertinent questions related to the sudden jump in the poverty rate in Bangladesh. How quickly will the new poor return to the non-poor status, ie, will the poverty reduction be slow or rapid? And what strategies do we need to counter the high rise in poverty?
The pace of poverty reduction, whether it will be slow or fast, will depend on the features of the new poor and the type and speed of economic recovery. SANEM’s recent household survey results show that a large proportion of the new poor is concentrated in the small and medium sized enterprises (SME) and services sectors. People employed in urban service sectors were especially badly hit by the pandemic. As most jobs in the urban services sectors are informal and job security is virtually absent in these engagements, the pandemic left these people with no options. Also, the SMEs, despite that they are among the most affected sectors, haven’t been adequately supported through the government’s stimulus packages. A large portion of the stimulus package announced for SMEs by the government remained unutilised, as most of the SMEs are outside the formal banking process, and no alternative mechanisms were put in place for them. SANEM’s two rounds of business surveys found that the economic recovery process for SMEs remained slow.
The question of the strategies of poverty reduction should involve non-conventional approaches to poverty reduction. Four major strategies can be followed.
First, the management of the Covid-19 crisis and economic recovery should be the priority. Given the extreme uncertainty in global markets, creating difficulties for export sectors to bounce back, a strong focus should be on the recovery of the domestic market. In other words, the policies and strategies for economic recovery should have a high priority for the revival of economic activities in domestic markets. The SMEs, in particular, should be given the utmost importance. One important point to ponder is that even if we see recovery in the export sectors, the positive effects of the recovery in exports, in terms of generating economic growth and reducing poverty, may remain weak for a long time due to the broken or suppressed supply chains in the economy. It should also be noted that due to such re-orientation of policies and strategies, economic growth is likely to be much lower than the official target. However, under the current crisis, even a low economic growth based on the revival of domestic economic activities can be robust, and it can lead to better distributional impacts during the recovery phase. Nonetheless, for better management of the Covid-19 crisis and for ensuring a robust path to economic recovery, there is a need to address institutional and governance-related challenges urgently.
Second, social safety net coverage, including direct cash transfers and food assistance to the poor, should be widely expanded. However, there is a critical political economy issue related to the management of this expansion, since the country spends very little on social protection as a percentage of GDP. Also, there are large loopholes in social protection programmes in the forms of leakage, corruption, wrong targeting and mismanagement. Therefore, there is a need for strong efforts, especially in making the social protection programmes more effective through properly identifying poor and vulnerable populations, and ensuring that the support actually reaches them.
Third, as the poor are making intergenerational adjustments by rearranging their priorities to cope with the crisis, such as spending less on education, health and entertainment, they are sacrificing the prospects for better health, better education and a better life. Students from distressed families are likely to bear a higher burden of this impact, and many of these students may permanently be out of the education system. Therefore, non-conventional, urgent and targeted programmes are needed to address the agonies of students from these families.
Fourth, the government policy response related to current labour market challenges has remained weak and inadequate. The new poor, with highly disrupted engagements in the labour market, are not covered in existing social safety net programmes. Therefore, the government should introduce new social safety net programmes targeting the labour market. In this context, the employment guarantee scheme for a certain period of time for vulnerable populations can be seriously considered. The government should also form a Labour and Employment Commission to assess the current unprecedented situation and suggest necessary measures.
Dr Selim Raihan is Professor, Department of Economics, University of Dhaka and Executive Director, South Asian Network on Economic Modeling (SANEM).
