ARTICLE: Because of Covid-19 we have already started spending a lot more on health cover than what we have been budgeting for this sector annually for most of the past 73 years. On education as well we are likely to be compelled to spend more than the usual amount that we allocate to the subject annually as online teaching is expected to become the new normal because of the extended closure of schools due to the prevailing pandemic.
The mobile phone companies which are making enormous profits could extend connectivity to almost the entire country at a cost not even a fraction of what they are earning from their current services. And with a one-time extra expenditure on hardware the authorities would perhaps be able to get most of even the estimated 20million out-of-school children in the on-line teaching loop as the software required for reaching the entire school age children in the country would cost next to nothing because most of it is available for free. And when and if schools open say six months or a year from now, the extended connectivity, plus the free of cost software could be put to work for the benefit of children who cannot afford to go to even government schools or are located where the brick and mortar reach of governments is very limited.
The authorities have already made provisions in the budget for launching an ambitious low-cost housing scheme for the poorer section of society. And with the coming on stream of the Peshawar BRT and the Karachi Circular as well as the metrobus service, masses living in the cities of Pakistan would have access to affordable public transport.
Already the expanded BISP plus Ehsaas programmes are serving as shoe-string safety nets, regularly distributing cash to our poorest of the poor.
Clearly, the risks that Covid-19 poses seem to be forcing the authorities to take the road to a welfare state: making available affordable health cover, affordable educational facilities, affordable housing, affordable transport and safety net for the poorest of the poor.
And if by December this year Prime Minister Imran Khan's PTI-led coalition government were to be seen sustaining the progress on this route, most of the political uncertainties surrounding it currently would perhaps disappear, hopefully.
True, every crisis offers an opportunity!
According to Martin Mühleisen, Vladimir Klyuey and Sara Sanya (Here's how fiscal policy can support emerging markets and developing economies through Covid-19 and beyond - published on 9 June 2020 in WEF's Weekly Agenda) for emerging market and developing economies (EMDE), the Covid-19 has triggered a policy response like no other, both in scope and magnitude.
Despite their diversity, and in some cases, strained resources, this large group of countries - consisting of emerging markets and low-income countries like Pakistan - have bolstered the provision of health services and extended unprecedented support to households, firms, and financial markets. However, limited policy space has kept the response at a smaller magnitude than in advanced economies.
Economic activity in EMDEs has decelerated at a pace unseen in at least 50 years as the impact of the Covid-19 pandemic ravages the global economy. Several countries are experiencing a sharp decline in trade and capital flows, and the impact of an unprecedented decline in oil and other commodity prices. A spate of sovereign downgrades has occurred.
Fiscal policy has been at the forefront of the EMDE response. Within EMDEs, the health crisis is necessitating massive health spending, though this increase has been dwarfed by the resources needed to support the broad economy. Countries have provided loans, guarantees, and tax breaks to corporations and SMEs, and extended support to vulnerable households with higher unemployment benefits and subsidies on utility prices.
Financing for these new measures emerged from a variety of sources, including borrowing, drawing down buffers, reprioritizing within existing budgets, and multilateral support.
Some economies like Pakistan's entered this crisis in a vulnerable state with already sluggish growth, high debt levels and limited fiscal space to support the health sector and the flagging economy. About half of all low-income countries were considered in debt distress or at a high risk of debt distress even before the crisis, as assessed by the IMF's Debt Sustainability Framework. Partly reflecting these constraints, the total discretionary fiscal response to the shock has been lower (although still sizeable) in both emerging market and low-income economies at 2.8 and 1.4 percent of GDP respectively in extra spending and tax reductions.
The authors of the above mentioned article further state:
EMDE central banks cushioned the impact of the shock on credit conditions through policy rate cuts and liquidity injections. Most emerging market economies lowered policy rates (most of them by 50 basis points or more) rather than raising them. This could be attributed to lower inflation pressures and generally more credible monetary policy frameworks.
Regulatory restrictions including those on liquidity and loan classification have been loosened to help banks play a more supportive role during the pandemic.
Currencies of EMDEs with flexible exchange rates have depreciated in response to outflow pressures and heightened risk aversion-over 25 percent in a few cases.
Many economies took advantage of their buffers to offset some of the pressure by intervening in the foreign exchange market and drawing down their international reserves. A few countries eased existing capital controls on inflows, while recourse to measures to curb capital outflows has been very limited.
Some developing countries are using digital technology to counteract the sudden economic distress on households and small and medium-sized enterprises, and to limit the spread of the disease by encouraging cashless payments. Others are ensuring affordable access to digital (easing restrictions on internet access) and financial services (mobile money and electronic payments charges). Some have provided subsidies to small-scale farmers through the digital platform.
As the pandemic and prolonged lockdown hampered global supply chains, many countries took steps to ensure food security and continued access to medical supplies, mostly on a temporary basis. For example, several countries introduced price controls and issued regulations against price gouging for basic food items and medical supplies. Some eased import controls. Unfortunately, in several cases restrictions were introduced on the exports of food and pharmaceuticals.
Indeed, in response to the Covid-19 shock, the global financial safety net has been activated and strengthened. The US Federal Reserve has established new swap lines with central banks in several major advanced and emerging economies.
The G-20-led debt moratorium initiative, and financial assistance from the IMF and other institutions are helping EMDEs cope with the challenges. The IMF has quickly provided emergency assistance to more than 60 countries. Further, as demand for liquidity increased, the IMF recently established a new Short-term Liquidity Line as part of its Covid-19 response to augment its lending toolkit. In addition, massive liquidity provision by major advanced economy central banks, while directed primarily at domestic financial conditions, has also alleviated pressures on emerging market and developing economies.
At the same time, EMDEs are also extending assistance to each other and other countries in need. In particular, Regional Development Banks are providing support for private sector enterprises, trade finance and continued access to medical supplies. Examples of bilateral assistance include Albania, which dispatched a team of doctors to Italy, and Vietnam, which donated medical supplies to neighboring countries as well as advanced economies.
EMDEs have been heavily affected by the COVID-19 shock and market reaction that it triggered. The analysis of the IMF Policy tracker shows an extraordinary policy response, bolstered by innovation and international cooperation. In this unprecedented and fast-moving situation, countries can benefit from learning from their peers, and the Fund is committed to collecting and sharing best practices and incorporating this data into its own analysis to continue to assist membership.
Meanwhile, according to Jeevun Sandher, PhD, Department of Political Economy, King's College London and Hanna Kleider, Lecturer in public policy, King's College London (COVID-19 could change the welfare state forever - published in The Conversation on 30 June, 2020 in WEF's weekly agenda) the most pertinent historical parallel to the current pandemic crisis is the Second World War.
"After the war, governments dramatically increased both the number of people covered by the welfare state and the value of the payments they received. At that time, people were demanding greater social insurance in the face of universal risks and pervasive uncertainties".
The late 1970s marked the end of this golden era the world over. Milton Friedman, his Chicago school of thought, technological advances, demographic change and globalization had led to cuts to the generosity of modern welfare states.
Alongside these structural pressures, automation and trade were also destroying mid-skill manufacturing occupations. Labor markets became segregated into high- and low-skilled jobs. And while high-skilled workers didn't feel the need for an expanded welfare state, those working in low-skilled professions were too small a constituency to make a difference at the ballot box.
In short, structural pressures in rich countries were making the welfare state more expensive as social profits were deducted out of the balance-sheets and only financial profits were started being counted in.
Just as with the second world war, "one happy consequence of this otherwise desperately unhappy experience of Covid-19," may be a more generous welfare state that insures most of the destitute population of the world against the risks posed by illness and poverty.
Copyright Business Recorder, 2020
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