COVID-19 Triple Impact: World Bank advocates widening of social protection, progressive taxation

COVID-19 Triple Impact: World Bank advocates widening of social protection, progressive taxation
A Myanmar farmer ploughs the paddy field to grow rice at a farm in Moulmeingyun township of Ayeyarwaddy region, Myanmar. Photo: Lynn Bo Bo/EPA

Analyzing the triple shocks experienced by countries in East Asia and Pacific (EAP), viz., the pandemic itself, the economic impact of containment measures, and reverberations from the global recession brought on by the crisis, the World Bank’s periodic economic update for EAP points out “Country outcomes were generally related to how efficiently the disease was contained and how exposed countries were to external shocks.”

As per the update, in the current circumstances, testing, tracing and isolating the infected individuals; and WHO precautionary measures are the only known approaches to contain the virus for now. At the same time augmenting health care infrastructure is an urgent need for most developing countries of the region in order to manage the the health crisis and reduce the fatality rates.

Released on the 29 September, the WB-EAP Economic Update acknowledges the rise of a second wave of localized infections in Myanmar and exhorts the country to take steps to contain the same. The report lauds the pandemic containment efforts of the government of Myanmar and the turn around it has been able to bring with a small positive growth along with Vietnam and China while most of the neighbouring countries continues to be in deep recession and negative growth.

On growth and poverty

The EAP region as a whole is expected to grow by only 0.9 percent in 2020, the lowest rate since 1967. While China is forecast to grow by 2.0 percent in 2020 – boosted by government spending, strong exports, and a low rate of new COVID-19 infections since March, but checked by slow domestic consumption – the rest of the EAP region is projected to contract by 3.5 percent. The contagion effect of China’s growth on ASEAN is anticipated and that would be one of the factors to contribute to a quick and positive recovery of Myanmar’s economy. Shift in global value chains to the ASEAN region is also an anticipated fallout, that is expected to benefit Myanmar. As a matter of fact, China’s EAP regional trade has increased close to 8% during the last year which reflects the potential for exports to china from the region. Even Chinese FDI may also see an increase in the region.

The COVID-19 shock is not only keeping people in poverty but also creating a class of new poor. “Poverty in developing East Asia and Pacific could increase for the first time in 20 years. The COVID-19 pandemic is expected to reverse the sustained trend of poverty reduction in the region. Prior to the onset of COVID-19, 33 million people were projected to escape poverty in 2020 based on the upper-middle-income class poverty line (US$5.50/day, 2011 PPP). Instead, based on the latest GDP forecasts and past growth to poverty elasticities, poverty is likely to be 1.6–1.8 percentage points higher than previously projected. This translates into between 33 to 38 million more poor people than in the pre-COVID-19 scenario. While poverty in China is projected to decline, poverty in the rest of the region is projected to increase.”

According to the World Bank update, the transmission of impact of COVID-19 on inclusive longer-term growth is through three channels, namely investment, human capital and productivity. While Myanmar has so far been able to withstand the investment impact, with steady flow of investments (that were earlier in the pipeline), it is imperative for the government to address some of the structural reform issues related to the export sector, trade reforms, infrastructure bottlenecks, labour, finance, and land and environment in order to create an enabling investment climate. In the medium to long term, investment flows are expected to be robust. As pointed out in the reports of several multilateral agencies and government’s own CERP, the crisis can be turned into an opportunity to usher in new transformations in the economy through green growth and sustainability considerations.

Immediate Response

Countries of EAP have responded swiftly and effectively in the early phase of the pandemic itself in order to protect the people from the economic fall out. The average size of fiscal measures announced to date in developing EAP, estimated at around 5 percent of GDP, was comparable to the other developing regions but varied considerably in size and breadth across the developing EAP countries with Thailand supporting citizens to the extent of 12% of GDP on health related and income support measures, while Myanmar has been able to invest about 1 % GDP on quick relief measures. More than the quantum of spending it is the quality and ability to reach the needy that mattered most. In this respect, the WB update points out that citizens and firms of countries that have strong social protection delivery mechanism benefited more from the fiscal stimulus compared to those who have weak institutional infrastructure to deliver social protection and support to MSMEs. Myanmar scores rather low in terms of reaching to the needy poor and also to MSMEs with relief support, though it has announced these measures quite early. It is pointed out in several micro level surveys that MSME firms were not aware of the support and the process of obtaining it. Commenting on the low off take, the WB update points out “One consequence of this large and rapid response has been that many governments in the region have found it hard to scale up their narrow social protection programs to reach the new COVID-19 poor in the middle class and the informal sector, groups that fall outside the scope of countries’ traditional social safety nets.”

The challenge of reaching the most vulnerable, remote and poorest of the poor requires institutional mechanisms that are tailor-made to meet the needs of such groups.

Prospects for Recovery

What are the prospects of recovery and how the countries need to negotiate it form a critical part of this update. One of the strong recommendations that emanate from this update is on social protection. “Social protection has a triple role: in mitigating the immediate impact of the crisis; in helping workers reintegrate as countries recover; and in preventing long-term harm to human capital. Widening social protection to cover all existing and new poor combined with investment in the infrastructure of delivery would ensure that help reaches people when they need it.”

As pointed out, the pandemic has created triple impact and the recovery has to start from addressing the pandemic itself. This would mean, countries have to adopt strategies that would contain outbreaks through more targeted and less disruptive interventions. Augmenting capacities in public health is an urgent requirement for countries like Myanmar

which is witnessing a slow surge of second wave of infection which is a challenge to the economic recovery measures. However, the recently announced containment measures in terms of lockdown of some of the city areas of Yangon are said to be well calibrated to arrest the spread of the virus. Secondly, revival of domestic economic activities is also linked to ‘smart containment’ measures. Given the land border connectivity across many countries of the region (ASEAN and EAP), gradual and well planned resumption of border trade would create stimulus to the economy, though tourism sector’s revival appears to be subdued for short to medium term. It is to be noted that several countries of EAP depend on tourism in a significant way in terms of growth and employment.

Recommendations

COVID-19 recovery presents significant challenges to the government in terms of macro economic management, reviving of the economy in the midst of pandemic and ensuring the health and welfare security of citizens. The slew of recommendations presented in this update need to be processed by the governments from the perspective of pragmatic prudence and political management of the recovery measures. After all the year 2020 has been a turbulent year for large sections of the society across the globe in terms of economic, social and psychological well being. Managing expectations of the citizens becomes important and hence a stable, balanced and humane approach is required when countries move towards recovery process.

The WB update points out the need to build capacities for smart containment as a major aspect that many developing countries of the region have to undertake as an urgent step. International cooperation is also important in this respect. Fiscal reforms in terms of widening tax base and progressive taxation is also important in order to ensure revenues for the governments who have been spending on the health and welfare measures. This has been advocated by many CSOs for years across the countries. Reducing avoidable subsidies and incentives would also work as complimentary to save up resources.

Financial prudence needs to be maintained by the governments in order to service the deficits so that financial reputation of the system remains intact. Measures to support firms may be based on a criteria of future potential as well as protection of employment. Measures to restore education and health services through digital approaches can be explored in countries which have significant reach of high speed internet. In other countries a combination of online-offline education with appropriate safety measures would perhaps becomes an option to ensure continued education for the poor and marginal communities.