Fiscal stimulus is crucial for protecting the poor in developing Asia
Fiscal stimulus is crucial for protecting the poor in developing Asia
WRITTEN BY DHARISH DAVID AND LAJJEETAA MANOKARAN
25 May 2020
Across the world, countries are announcing Fiscal Stimulus packages to counter the economic damage of the pandemic, with countries such as Germany and Japan allocating over 20% of their GDPs to support industries, businesses, and individuals most affected. Developed countries with larger fiscal space and a larger population in the formal sector have announced these business bailouts to contain unemployment as markets are in an induced coma. The UK, for example through its furlough scheme of £350 billion intends to cover up to 80% of monthly wages, up to £2,500 for 7.5 million of its workers, to keep them on company payrolls till October this year.
Developed countries in Asia are committing most of their fiscal stimulus to support businesses from laying off their employees by including measures ranging from moratoriums on tax and interest payment, loan guarantees, wage and income subsidies to workers. But many of these countries went a step further to also announcing a one-off cash payouts to their citizens. Japan initially planned to do a means-test on income to provide cash handouts but instead offered a one-time payment of ¥100,000 (US$930) to every adult and child. The success of Japan’s earlier voucher handout scheme during the 1999 recession has had an influence on South Korea’s decision now to provide up to 1 million won (US$835.28) in the form of vouchers to all lower-income families, helping at least 14 million families. Singapore’s government is providing a one-off payment of S$600 (US$423) to all its citizens above the age of 21.
Meanwhile, many developing Asian countries have committed less than 10% of their GDPs as a fiscal stimulus so far, with the lowest income countries committing less than 2% of their GDPs. Unlike their more wealthy neighbors, these countries though focused on salvaging jobs and keeping a check on unemployment, their largest concern, and focus is on the poor populations who are largely dependent on the informal economy, which can reach up to 80% of the economy. The World Bank estimates that at least 11 million people will slip back into poverty in East Asia and the Pacific, and another 16 million in South Asia due to the economic fallout from the pandemic.
Sources: Elgin and Yalaman (2020), IMF (2020), World Bank (2020)
Note: Fiscal stimulus plans are computed in the percentage of 2019 GDP, only for reasons of comparability. Many of these measures will only enter in effect in 2020 and may extend to years to come.
As many of these countries with fragile health-care systems have opted for full or partial lockdown as a prevention measure rather than relaxed social distancing measures which are more difficult and costly to enforce, this has resulted in many going out of jobs and being pushed to the brink of poverty and potentially facing hunger and malnutrition. In many cases this is also leading to protests and social unrest as slow government intervention means many are left with no other option. With less fiscal space, many developing countries are resorting to announcing support through cash or in-kind handouts within their stimulus packages targeting the poor and vulnerable.
Malaysia has committed to spending US$2.3 billion in direct cash payments for 4 million low-income households and has allowed for deferment in interest payment and other relief measures. The Philippines approved a US$3.9 billion social protection program providing $100–150 monthly aid to poor families for 2 months, giving US$ 2000 each to health workers who contracted the virus, and handing US$ 20,000 to the next of kin of every health worker who died from the virus. Thailand is using cash handouts schemes to assist up to 10 million farmers as well as 14 million non-farm workers who are outside the social security system. Indonesia’s cash transfers to 10 million families and basic food program is expected to reach out to 15.2 million families as part of its US$6.6 billion spending on social protection, that is also partially funded by the electronic transaction tax that taxes digital companies, which saw their operations expand during this period.
The efforts to provide cash handouts, especially in Laos and Cambodia, seem to be almost non-existent, possibly because the total number of cases in Laos and Cambodia are significantly lower compared to other ASEAN countries like Indonesia and Malaysia. Due to their low-income status, they depend more on foreign aid to combat the virus, of which Laos and Cambodia will be the beneficiaries of the US$ 14 Bn worth fast track package set by the World Bank.
Both India’s central and state governments are actively offering cash handouts and direct in-kind transfers (food and cooking gas) to help the poor survive the crisis, where state-level measures only amount to a meager 0.2% of India’s GDP. Unfortunately, with 60% of its population with incomes less than US$ 3.2 a day, and over 20% in extreme poverty, India has been extremely selective with its cash handouts. Benefits so far have only been to farmers in the agricultural sector and those already within the public distribution system and those registered in the government’s digital payment infrastructure.
Though China’s stimulus has been towards pushing in more liquidity and supporting its small business and workers it has been reluctant to provide cash payouts to its citizens, but it has announced welfare support to help vulnerable migrant workers. China’s social safety net is limited to small-ticket unemployment insurance payout and a minimum income (dibao) of 600 yuan (US$84.82) per month for those in poverty.
These cash payouts by governments are a form of ‘helicopter money’ that is neither new nor fully adequate to address the needs of the poor. Asian countries, like Japan, had quite successfully used it twice — during the 1999 recession and in 2016 to help with the slow economic growth. But in developing countries these one-time or periodic payments are crucial to protecting those in poverty and those outside the social safety who are in dire need and potentially avoid starvation. With many poor and non-poor households losing their income and savings and with no insurance, they will require monetary support for much longer than a month as economic recovery will also be slow now.
According to critiques this temporary ‘helicopter money’ solution may lead to a dependency that resembles a Universal Basic Income but benefiting only those who are under the poverty line. After all, within stimulus packages, cash transfers have the double benefit of providing for those in need while stimulating the economy through increased consumption. However, there may be a need in the immediate future to not just use helicopter money, but usher in some form of minimum basic income to those within and outside the social safety nets and public distribution systems. While countries could use this experience in developing a longer-term solution towards a minimum basic income that uplifts those under the poverty line yet providing them tehe motivation to work, by implementing novel ideas such as Milton Friedman’s Negative Income Tax based on a minimum income cut-off threshold.
The largest challenge in implementing such an unconditional cash or food transfer program in most developing countries is the inability in identifying and the delay in getting it to those who really need it the most. In most countries, expanding social assistance and cash handouts to the borderline poor and yet to be identified individuals such as landless laborers and urban migrants presents unique challenges as they are unable to access government services. Providing such cash and food transfers has already been met with challenges in many countries such as Thailand, Philippines, Indonesia, and India making it to the news, due to impediments such as bureaucratic red tape, political dissensions causing delays, and eventual inability to identify and distribute these benefits efficiently.
The temporary expansion of existing cash-transfer programs to cover more people and quicker disbursement of funds by strengthening existing digital payments and relaxing eligibility criteria will definitely help those in need, but only as long as they are banked. But otherwise tracking such individuals and delivering literal cash handouts is the only other way, which would require new and all the existing geospatial, microfinance, and governance innovations.
While the inability to reach out to everyone is a major concern, funding these handouts itself is the largest challenge for most developing countries. They do not have the fiscal and monetary space nor the luxury of a large pool of reserves or ability to borrow when compared to more developed countries with more sound financial systems. For such lower-income countries, these cash handouts schemes tend to be heavily funded by borrowings and foreign aid. Moreover, corruption remains a persistent problem, as there is always the danger that these resources may end up in the wrong hands.
Labeled as the worst economic downturn since the Great Depression, the Great Lockdown calls for exceptional responses to compensate for losses of lives and livelihoods, especially for those living under the poverty line. Government spending in developing countries will need to be voluminous considering the recovery will be prolonged, putting more pressure on already indebted governments which will see further fall in tax revenues and rise in political instability.
While it is not in all countries’ capability to afford to implement measures targeted at preventing and managing the spread of COVID-19, it is remarkable knowing that many countries have chosen lives over the economy. Still, there is an itching pressure on governments to shift their focus to reopening their economies from cushioning the impact as well as containing the spread of the pandemic. But regardless, this crisis has revealed the gaps and the need for prioritize targeted policies such as supporting micro-enterprises in the informal economy and bringing in more people into the social safety nets and food distribution programs to those who have not been identified and registered. Initially cash transfers may be the easiest, fastest, and most important way of helping the poorest, though there exists the challenge of the poorest being unbanked. But in these extra-ordinary circumstances there is no excuse for governments to avoid spending even if that means a larger budget deficit, as ironically many of the same developing countries easily spend more than 2% of their GDPs on defense expenditures annually.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Dharish David is an associate faculty for the University of London at the Singapore Institute of Management — Global Education (SIM-GE), teaching courses relating to political economy
Lajjeetaa Manokaran, Undergraduate Student in Economics and Politics at the University of London, Singapore Institute of Management — Global Education (SIM-GE). Image credit: EU Civil Protection and Humanitarian Aid/Flickr.