By B.DULGUUN
Economist
Poverty in time of COVID-19
There is no question about whether COVID-19 will increase poverty. The only question now is by how much. That depends on what kind of policy the government will implement and how these will affect employment.
In general, all policies carried out by developed, developing and emerging markets can be categorized into two main policy pillars: supporting households and citizens, and supporting businesses and keeping jobs. When the pandemic hit the economy in the first half of 2020, the government leaned more towards supporting households, through increasing the child money allowance, improving food coupons and such. On the employment side, the government reduced the social security premium to 2 percent and assisted through unemployment support, which lasted until November. Although the household support will continue through to the end of the coming presidential election in June 2021, there is not much policy targeting retainment of jobs, supporting businesses, and avoiding bankruptcies.
Unless the government addresses the missing pillar, a vicious cycle will harm the people and economy alike in the medium to long term. A cycle of poverty usually starts with unemployment as official and unofficial businesses shed employees or close doors, which concurrently pushes households into poverty as unemployed workers struggle to find a new job during a crisis.
At this point in time, there is no official forecast made on how much the poverty level will rise. Even then, it is now clear that unless the government acts as soon as possible to reverse the trends for deteriorating balance sheets and falling employment numbers, unemployment will swell well into hundreds of thousands in the short term and the country will find itself in a deeper socio-economic crisis.
According to the World Bank study in 2018, about 14.9 percent of population or 475,000 people will slip into poverty if there is any economic shock.
Today, the economy is hit by a shock that affects the unskilled and low-income group disproportionally. The economy suffered negative growth for four consecutive quarters before rebounding in the third quarter of 2020. Without any doubt, the fourth quarter growth this year will be negative as lockdown restarts on December 23. Only the targeted policies backed by required capital can save hundreds of thousand jobs at risk, and precisely these measures will assist many from falling into poverty in the coming year.
According to research conducted by the SICA during lockdown, 21.6 percent of workers took time off without salary, 20.7 percent cannot carry out their business, 5.1 percent took time off with salary as oppose to 26.5 percent being able to work under lockdown and 11.1 percent worked online part time. This figure doesn’t seem too bad, but we should be reminded again that unemployment is a lagging indicator. Besides, the survey does not capture the true nature of informal employment or income. There is no good news here, but only moderate bad news. One of these is about the policy targeting households, which seems to be working. Although on average, household income fell by 40 percent during lockdown, income for those whose income is below 500,000 MNT increased, as the SICA study suggests.
By July 2021, welfare support measures expire, many households will certainly find themselves ever poorer than at the start of COVID-19.
Whatever the state subsidizes in form of social welfare is temporary for most households and it cannot subsidize everything even though most need further support. Besides, never before in the world and in the history of mankind, has a country eliminated poverty solely through handouts or welfare programs.
I agree that the welfare programs are absolutely essential to its intended target, whose daily intake of calories cannot sustain their healthy. The only long term and time-tested programs are the ones that take the form of employment and skill building. Anyone who argues otherwise either has not seen enough in the world or has abandoned reason.
Fighting poverty is always a long-term process. The welfare policies in place are there not to eliminate but rather to reduce suffering at the same time, giving just enough breathing space for those intending to work towards a better future.
Facts on the ground
There are 1.1 million Mongolians in the labor market and about 200,000 are working in the public sector. Another 200,000 are in the informal sector. The rest are employed by 97,000 private companies. Without government policies for the private sector that specifically addresses the most persistent problems, many will close doors permanently, and many more will shed jobs in order to survive.
Again, this is the missing pillar in the policy and the government is clearly failing. Having said that and knowing how the concept can be twisted, I am obliged to say that the policy to support business is not just to support rich businesspeople who horded billions in the bank, but rather to support households whose income totally depends on keeping their jobs today. The bottom line for this policy pillar is not at all about giving to those who have, but rather to support the have-nots to keep their livelihood intact in a post COVID-19 world.
Certainly, it is legitimate for anyone to question or doubt that even if businesses receive support, many companies will shed jobs regardless.
I have two things to say for that. First, the policy to support business can be conditioned on keeping jobs and the specifics can be tailored according to its sectoral characteristics. Second, even if these businesses shed employment with the policy support, these lost jobs can be created within a shorter time period after COVID-19 than its alternative, businesses going bankrupt.
Some studies suggest that saving one job is five times cheaper than creating one. In addition, creating employment for newer companies is harder than for already established ones when they expand. The logic here should not be hard to understand for people who have done any business.
What’s missing; lack of money or political will?
If one says there is no political support to save businesses because politicians are such cowards and refuse to spend capital on doing the right thing economically, then I argue that it cannot be true. Why? Out of all 97,000 that still operate and submit their tax reports one way or another, 85,000 of has less than 10 employees. We can categorize them as household operation or small business.
Ulaanbaatar, where the strict lockdown was enforced, is home to about 60,000 those small businesses. They provide the bulk of the employment, and run by people around us, rather than those who fly in private jets and collect classic cars. Hence the government developing policy that support businesses should not be opposed by common folks even if it means choosing between additional household support or for business. So, what is missing: political will or the actual money to finance?
One might get puzzled over politicians missing in action and shake heads in disbelief that these things cannot happen if supporting business can be so popular with workers and households. So, one assumes there must be other obstacles, such as government inability to scramble together finance to implement the policy to support businesses and save jobs. One can also assume many other things and shake heads at every turn.
When times are tough, there is one principle: go back to numbers. In pursuit of this principle, the state budget for 2021 helps us to illuminate our path for thinking forward, answer questions, as well as shoot down those assumptions that cannot stand ground.
According to 2021 Budget Law, the Mongolian state earns 13.1 trillion MNT and spends 13.9 trillion MNT, 3.5 trillion MNT and 2 trillion MNT of which are allocated for investment and procurement of goods and services, respectively. As oppose to such enormous expenditure, only 2.4 trillion MNT is to be spent for salaries of all public employees. For anyone who shuffles through the investment list, it is easy to spot building of museums, theaters or citizen halls or their repairs. Hence, I believe that the political will, not the money, is in short supply. In time of a pandemic, such cowardice and unwillingness to support employment over government tenders that usually favor the politically connected is a mistake that will have long-term consequences.
Previously, the government made same mistake in 2020 as the pandemic began. The government investment allocation for monuments, museums and whatever items that was non-essential all went ahead without any amendment. Whenever the Ministry of Finance asked for such irresponsible allocation, they reasoned that the company who wins tenders and procurement can keep jobs if not create additional ones and the reasoning never went further than that. To an economist, that sounded like an excuse rather than reason. My guess is that the minister tried to hide his true intentions with such statements. Underneath his reluctance to support businesses, it is hard to say how much is his willingness to support current public expenditures that goes to politically connected companies and how much is his avoidance of political repercussions rising from reduction of investment and procurement.
Whatever is the case, the truth is that the state can save several folds more jobs in the private sector if it channels money into ailing firms through targeted policies than spending it on public investment and procurement. There is also a moral view to this angle. The government has greater obligation to support companies that have been working on their own without taking a cent from the state and paying taxes. The companies that survive on government procurements can wait.
Morituri te salutamus
The more entrepreneurs independent of the government fail, the less there will be individuals willing to take the risk of starting a business in the future. There will be fewer companies paying taxes, and fewer people being employed. As a result, the economy will grow slower and budget revenues will plunge. Economists call this economic scarring.
Being entrepreneur or a businessman is not easy. They take risks not just with their time and effort, but also with their existing wealth, sometimes take it as collateral to raise capital through banks or non-banking financial institutions. They are the job creators, wealth producers and the engine of the economy. The state is not a source of job creation and should remain that way.
A week ago, one businessman wrote on social media that if he is to be asked to choose between to losing his business, which he spent eight years developing, or get infected with COVID-19, his answer would be to get COVID-19. It is not as if he does not love himself or has some suicidal thoughts, rather he weights his risks. The risk of death or disability from COVID-19 versus the risks to his business and livelihood. But he does not have to choose between two difficult choices if only the government comes to his aid. This is the exclusive power of the government, which it wields in times of crisis or war.
In normal times, when a business gets bankrupt, the responsibility for failure rests on the business owner. Under lockdown, it is different. The government decides to close all business and restrict all movement, and hence gives no chance for even thriving businesses to succeed. Putting further debate aside, the decision makers should bear the responsibility too.
The debate is not about having lockdown or not. It never was. If the government decides that lockdown is absolutely necessary for public health, then a lockdown should be enforced. But given the decision and the state of the economy, the government should realize its responsibility and implement a policy to keep jobs and businesses afloat.
Again, the government has the money as the budget illustrates, and even if the prime minister or minister of finance shirks from dealing with the political consequences, the country can borrow. After all, the support to businesses is mostly in the form of loans or guarantees, which will be payed back or never used in the first place if the good times returns. Why can’t the government use tax revenue to support the very people who pay it?
If you live, we all live!
If Mongolia is to become a country that propels children to compete on the world level in the near future, we must ensure that their parents at least have a secure job to facilitate that opportunity.
If ailing jobs and companies disappear, it will be at least few times more expensive to create new ones and, more importantly, it will take years to recover to levels prior to COVID-19. Meanwhile, the socio-economic costs will devastate not just the poor, but everyone except the super-rich.
In seven months, our country may have a new president and new prime minister, possibly new minister of finance. For those seeking the top jobs of the country, I have one message for you: Do the right thing and do it now!
