Thabi Leoka | The impact of Covid-19 will be much deeper than we realise

In just a few months,
the Covid-19 pandemic has taken a dramatic toll on the economies and
institutions around the world, and the number of new cases, economic
dislocation and deaths continue to mount.

Decades of progress
raising living standards and reducing poverty have been replaced by increasing
food insecurity and inequality. Scenes of queues meandering through townships
of people collecting food packages have become all too familiar. We are faced
with the stark reality of the dis-ease of the disease and the shock is going to
be long-lasting and severe.

The pandemic is a
health, economic, and environmental problem. All are interlinked, requiring us
to have a comprehensive approach of inclusive and sustainable development.

When the lockdown
began on 27 March, it was hoped that firms would keep all workers on their
payroll because workers are highly valuable economic assets. Some firms cut a
percentage of workers’ salaries but kept them employed.

The logic behind this
is that when a firm lets go of employers, that employer will have to go look
for a job in a tough economic environment. This may take long and delay
productivity. Uncertainty created by the loss of employment will make that
person less likely to spend money. This will crimp demand, causing businesses
to avoid hiring, leading to higher unemployment, more uncertainty and even less
consumer spending. In this environment, an economy goes into a recession or
depression.

An employee who keeps
their job during the lockdown will get a salary while working from home. When
the lockdown ends, they continue to either work from home or go into the
office, but because there has been no disruption in earnings, that employee
will continue spending, supporting firms to continue operating and hiring more
workers. In this scenario, the economy will bounce back quickly.

Because the lockdown
was protracted, the damage to the economy will be severe. The unemployment rate is
likely to be about 37{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, and if discouraged workers added, this figure could
increase to 43{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}. Reversing these figures will be particularly challenging.

Worryingly, literature
on previous recessions demonstrates that younger workers are faced with a
lifetime penalty when entering the labour market during a recession. In the
2019 study by the Journal of Labour Economics, Schwandt and von Wachter
demonstrate that initial difficulties entering the labour market during
economic recessions led to much weaker earnings and career advancement of up to
10 to 15 years. The effects are also expected to last a lifetime.

At the firm level,
larger firms are likely to have greater access to the liquidity required to
smooth over temporary shocks. Workers at small firms will be disadvantaged
since they tend to earn lower wages. This suggests the large firm wage premium.

According to the World
Bank, where the large firm wage is comparable to the average gap between male
and female wages, or two-thirds of the gap between urban and rural wages, the
firm size effect dominates the age effect, so that even older workers at the
smallest firms will see large earning losses. This evidence suggests that a
younger worker in a small firm will see earnings fall significantly compared to
an older worker in a large firm.

As the governor of the
SA Reserve Bank, Lesetja Kganyago, recently pointed out, there is no post
Covid-19 era: what we are experiencing is the new normal. This requires us to
adjust to the new paradigm in which we find ourselves.  As the economy opens up, working from home
may be the normal, which means many of the newly built and spruced up offices
in the Sandton CBD, for instance, will be hollow for most of the year and
possibly longer. The shift to working from home is a global trend. The CEO of
Twitter, Jack Dorsey, has asked his staff to work from home indefinitely and
some companies in South Africa have asked to return to the office in 2021.

When all the smoke has
cleared, the most damaging long-run economic impact of the Covid-19 pandemic
will probably be a further increase of market concentration in big, powerful
firms as many small and medium-sized competitors will disappear due to financial
constraints.

Small and medium-sized
enterprises account for about 20{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of GDP and employ 47{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of South Africa’s
workforce. They are the productive drivers of inclusive growth and after years
of being crowded out by the large oligopolies, their growth and significance to
the economy was finally being recognised.

Despite fiscal
constraints, it is important for government to indiscriminately provide safety
nets for the informal and small and medium-sized enterprises. The preconditions
for funding are unnecessarily onerous, putting further hurdles to a sector
already burdened with challenges.

This new decade has
thrown a disruptive curve ball which requires us to think anew and adapt. Those
who resist will cease to exist and those who are malleable will fare better.