Dulguun Baasandavaa, Economist
December 2020
Poverty in time of COVID-19
There is no debate whether the COVID-19 pandemic will increase poverty or not. Only question now is by how much. That depends on what kind of policies the Government of Mongolia (GoM) is going to 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: first, supporting households and citizens; second, supporting businesses and keeping jobs. When the pandemic hit the economy in the first half of 2020, the GoM leaned more towards supporting households through increasing monthly child allowances, distributing additional food coupons etc. On the employment side, the GoM reduced the social security tax to 2 percent from 23 percent and dispersed unemployment support that lasted until November 1, 2020. Although the household support will officially continue until the upcoming Presidential election in June 2021 and social security tax is now at 17 percent, a policy that will lead to jobs retainment, business support, and bankruptcies avoidance is desperately missing especially when the private sector needs it the most due to full lockdown.
Unless the GoM does something for supporting business and retaining jobs, a vicious cycle will harm people and economy alike in the medium- and long-term. A cycle of poverty usually starts with unemployment, as formal and informal businesses shed employees or close doors permanently, which concurrently pushes households into poverty because many of unemployed workers are unable to find jobs during 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 GoM acts as soon as possible to reverse the trends of the deteriorating balance sheets and falling employment numbers, the country will face unemployment numbers swell well into hundreds of thousands in the short-term and will find itself in a deeper socio-economic debacle that could have been avoided.
According to the World Bank study in 2018, about 14.9% of Mongolia’s population or 475 thousand people will slip into poverty if there is an economic shock. Today, the economy is hit by pandemic where the impacts on unskilled and low-income group is disproportionally worse than those with higher skills or high-income groups. Without any doubt, the economic growth is going to be the worst since 1992 when the economy fell by 8 percent as the country transitioned from centrally planned to free market economy. Still, the GoM has no policies backed by required capital yet that will save those hundreds of thousand jobs. Without these policies targeting employment and business continuity, most likely those 475 thousand Mongolians will slip into poverty in the coming years as the welcome support measure expire.
According to the research conducted during lockdown by consulting company SICA, 21.6% of Mongolian workers were forced to take time-off without pay, 20.7% cannot continue their own businesses, 5.1% took time-off with pay as opposed to 26.5% being able to work under lockdown and 11.1% worked online part-time. The statistic is not eye-popping bad, but everyone should be reminded again that unemployment is a lagging indicator. Besides, the survey does not capture the true nature of informal employment or income. Saying goes that there is no good news, but only less bad ones. One of the less bad news is about the support policy that is targeting households, which seems to be working. Although on average, the household income fell by 40% during lockdown, income for those in the bottom quantile increased as the SICA study suggests.
Facts on the ground
There are 1.1 million Mongolians in the labor market and about 200 thousand out of total are working in the public sector. Another 200 thousand workers are in the informal sector. The rest is employed by 97 thousand companies that comprise the private sector. Without the GoM policies for private sector that specifically addresses the most pressing problems, many companies 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 GoM is failing outright. Having said that and knowing how the concept can be twisted, your author is obliged to say that the policy to support businesses is not just to support prosperous businessmen and businesswomen, who hoarded billions of tugriks in banks, but rather to sustain those households whose income totally depends on keeping their jobs. The bottom line for this policy pillar is not at all about giving to those who have, but rather about supporting the have-nots to keep their livelihood intact in the post pandemic world.
Certainly, it is understandable for anyone to question that what if companies fire employees despite receiving support. Your author has two things to say to that criticism: first, the policy to support businesses can be contingent on keeping jobs, and the specifics can be tailored according to its sectoral characteristics; second, even if these businesses shed employment despite the policy support, these lost jobs can be created within shorter time period after COVID-19 than its alternative of not doing anything when those businesses get 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.
A reason for missing the pillar: lack of money or lack of political will?
Out of all 97 thousand Mongolian companies that still operate and file their taxes one way or another, 85 thousand of them have less than 10 employees. We can categorize them as household operation or small business. The capital Ulaanbaatar city, where the strict pandemic lockdown was enforced, is home to about 60 thousand of those small businesses. They make up the bulk of the employment, and run by people around us, rather than those who fly in private jets and collect antique cars.
Personally, your author thinks it cannot be money. According to the 2021 budget, the Mongolian government earns 13.1 trillion tugriks and spends 13.9 trillion, out of which 3.5 trillion and 2.0 trillion are allocated for investment and procurement of goods and services respectively. As opposed to such enormous expenditure, only 2.4 trillion tugriks are to be spent on salaries of all public employees. For anyone who shuffles through the investments list of the budget, it is easy to spot earmarked items like building of museums, theaters, citizen halls, or maintenance of those buildings. Hence, I believe that the political will, not the money, is in short supply. In the time of pandemic, such cowardice and unwillingness to support employment over the government tenders that usually favor politically connected is a mistake which has long-term consequences. Underneath the GoM’s reluctance to support businesses, it is hard to say how much of it is politicians’ willingness to support the current public expenditures that goes to politically connected companies and how much of it is general avoidance of political repercussions that may arise from the reduction of investments and procurements.
Whatever is the case, the truth is that the GoM can save few times more jobs in the private sector if it channels financing into ailing firms through targeted policies than spending the budget on public investments and procurements. There is also a moral view to this angle. If I may say, the GoM has greater obligation to support companies that have been working on their own without taking a cent from the state and been paying their taxes. The companies that survive on government procurements can wait.
Morituri de salitamus
The more entrepreneurs independent of the government fail, the less there will be individuals willing to take risks of starting businesses 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 suffer. Economists call this concept as “economic scarring”. Being an entrepreneur or businessman is not easy. They are the job creators, wealth producers, and the engine of the economy. State is not a source of job creation, and perhaps better remain that way.
A week ago, one businessman wrote on a news platform that “if he is to be asked to choose between losing his business that he spent 8 years to build or to get sick of COVID-19, his answer would be the latter.” It is not that he does not love himself or has suicidal thoughts, rather he is weighing his risks: the risk of possible death or disability by getting sick of COVID-19 versus the risk of his business and livelihood coming to an end. But he does not have to choose between two difficult choices! If only the government comes to his aid. This is the raison d’etre of government and only government has the means to aid him during crisis or war.
In normal times, when a business gets bankrupt, the responsibility for failure rests on business owner. Under lockdown, it is different. The GoM decides to close all businesses and restrict all movement, and hence gives no chance for even thriving business to succeed. Putting further debate aside, the decision-makers should bear the responsibility too.
Today, the debate is not about having lockdown or no lockdown. It never was. If the GoM decides that lockdown is absolutely necessary to protect public health, then lockdown should be enforced. But given the nature of its decision and the state of affairs in the economy, the GoM should realize its responsibility and hence also implement the policies to keep jobs and business a float. Why cannot the GoM use the tax to support the very people who pay it?
If you live, we all live!
Finally, imagine a car engine. If the fan-belt is broken or about to break, better change it as soon as possible. Otherwise, the broken fan-belt can cause engine to melt. Once that happens, changing the fan-belt does nothing. One must replace the entire engine before the car gets moving, which can cost a few hundred times more. Remember, it is the same with jobs and companies. If those jobs and ailing companies disappear, it will be at least a few times more expensive to create new ones, and more importantly, it will take years to bring up to the pre-pandemic levels. Meanwhile, the socio-economic costs will devastate not just the poor, but pretty much everyone except the super-rich.
In 2021, our country may have a new Prime Minister and a new Minister of Finance, possibly even a new President. Whoever are going to be elected to these positions are holding powerful positions in the GoM now. So for those who are imagining themselves in the shoes of the President or the Prime Minister, I have one message for you: do the right thing and do it now! If you don’t, don’t you ever say that nobody warned you about the consequences of inaction!