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Protecting the poor from global crisis
As G20 leaders gather in the UK for the upcoming summit on tackling the global financial crisis, they will face major challenges, focusing on aggressive fiscal stimulus to boost economic demand, dealing with toxic assets in banking systems, boosting the resources of multilateral institutions such as the IMF and the World Bank, ensuring retention of the progress made in global free trade and avoiding the disastrous protectionism of the 1930s.
The pressures within Bangladesh to tackle the financial crisis has also risen in recent weeks, with calls from the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) for a Tk 6000 crore package and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), Bangladesh Jute Association (BJA) and other assorted trade groups asking for fiscal and monetary support, ranging from 10 percent cash incentives to lower bank interest rates and repayment moratoriums.
Some actions to offset the spillover effects of the global crisis are warranted. However, Bangladesh policymakers face a challenge in terms of targeting sectors that have genuinely been affected by the crisis and not becoming susceptible to the natural tendency for every business group to seek cushions, whether they are warranted or not.
But this week, I will focus on the challenges of protecting Bangladesh's poor from the effects of the global crisis. 1 will not dwell too long on the justification or otherwise, of the BDR mutiny last month. Whether there were legitimate grievances in terms of low pay/promotion prospects and lack of participation in UN peacekeeping from the BDR rank and file, it is impossible to justify the
kind of barbaric killings we saw, which included some civilians.
However, one might objectively argue that while the responses were extreme, the tensions between the "haves and have nots” in many third world countries is something that governments need to be cognizant of.
The economic boom that preceded the current bust in countries like India and China and even the US saw a large increase in income inequality. As a record number of billionaires were created in the BRICs, many in the villages of India and China continued to struggle to make a subsistence living.
In Bangladesh, the spontaneous and violent protests seen by workers in the garments industry, might be another manifestation of the entrenched feeling of injustice by the people at "the bottom of the pyramid", to paraphrase the famous book by University of Michigan Professor CKPrahalad.
A recently published IMF report titled "The Implications of the Global Financial Crisis for Low-Income Countries", notes that the global financial crisis is expected to have a major impact on low-income countries (LICs) that arc exposed to the current global downturn more than in previous episodes, as they are more integrated than before with the world economy through trade, Foreign Direct Investment (FDD,
and remittance. They go on to note that in many LICs, the ability to offset adverse shocks through spending hinges on higher donor support. With many countries facing binding fiscal constraints, and the outlook for significantly increased bilateral aid flows unlikely, many countries will need to rationalise spending and increase efficiency to create fiscal space for protecting social and Millennium Development Goals (MDG) related spending.
Efforts will also be required to strengthen revenue mobilisation. Given the economic downturn, efforts to strengthen safety net programmes to protect the poor become more urgent. Transfer programmes that effectively target the poorest often result in a larger stimulus to aggregate demand, given their higher propensity to consume. The capacity of many LICs to put in place newly targeted programmes will be limited in the near term.
As the chart attached shows, fiscal deficits have increased for all low-income countries, albeit the swing has been more extreme for commodity exporters than importers given the collapse in commodity prices.
One positive benefit for Bangladesh's poor, as illustrated in the chart, is the sharp decline in both energy and food prices as a result of the collapse in global demand. But there are a number of more specific steps we should
consider taking.
Firstly, overseas workers laid off and forced to return to Bangladesh should receive a “transition allowance", to cushion the blow for their families from the loss of income, many of which hit the poor in the villages.
In addition, the government should pro-actively set up a network of vocational training colleges so that returning overseas workers can be re-trained in higher value-added professions and be in a position to get higher-paying jobs as the global economy picks up and the demand for migrant workers resumes in 2010.
While the current cyclical downward pressures on demand is at the forefront of everyone's minds, it is important not to overlook the longer-term structural demographic trends, namely the ageing of populations in Europe and parts of Asia such as Japan and China. Bangladesh is well positioned, so remittance flows will double on a 5-10 year view.
A second priority to safeguard the poor is to ensure workers in RMG and other sectors receiving export assistance or cash subsidies from fiscal measures see material benefits from government packages. Specifically, companies who receive government assistance ensure at least part of the subsidies goes directly to the workers either in pay or subsidised accommodation or food. Although there has been much
talk of the "Walmart effect" or the resilience of Bangladesh RMG to global recession, downward pressures on garment prices and hence margins might force factory owners to try and push RMG workers' pay down, with potentially catastrophic social and economic consequences.
We also need to remain focused on the most effective means of increasing agricultural productivity and providing more effective access for farmers to both technology and financing. Higher crop yields remain an important priority to raise rural standards of living.
The broader challenge is one of how to increase the standard of living and quality of life of the poorer members of Bangladeshi society, while maintaining a conducive business environment for the businessmen and entrepreneurs to create wealth.
Income re-distribution is necessary and the latter group needs to persuade to pay a greater share of their profits and income in taxes to allow this to happen. But at the W same time, the government needs to ensure that we can maintain and perhaps even increase the rate of growth of the economy in these extremely challenging times of the global financial crisis. This will require greater focus on ensuring progress on tacking the energy and infrastructure deficiencies in the economy and attracting greater foreign investment.
Bangladesh has fortunately been less affected by the global crisis than the majority of other emerging markets in Asia. But we are not immune from both an equity and social cohesion perspective and we need to ensure that any counter-global crisis strategies remain inclusive and focused on protecting the most vulnerable in our society.
The writer is the managing partner of Asian Tiger Capital Partners and welcomes feedback at ifty islam@at-capita) com