Jobs at risk: Policy responses to COVID-19 in emerging markets

Çağatay Bircan, Zsoka Koczan, Alexander Plekhanov 21 April 2020

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The Covid-19 shock has laid bare some of the most vulnerable parts of our economies. Across Europe, services – sectors severely impacted by the lockdowns – typically account for more than 60% of the workforce (Figure 1). For instance, small services businesses employ more than 50% of the entire workforce in countries like Cyprus, Greece, Latvia, and North Macedonia.

Figure 1 Share of services in total employment by firm size groups in 2017

Source: Eurostat.
Notes: Firm size definition follows Eurostat
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How much unemployment are we facing?

Many businesses across Europe have already engaged in immediate layoffs or furloughed their workers. A quick way to estimate the size of job losses in the near term is to combine official data with surveys of businesses’ response to COVID-19. For instance, a survey of small businesses in the US by the Small Business Investor Alliance found that around 20% of the workforce in the wholesale and retail sector lost jobs by mid-March, and two in three firms anticipated further layoffs (SBIA, 2020).

Combining this information with sector-level employment figures from Eurostat, as of end-2019, suggests that 20 to 25% of all payroll workers across Europe may already be out of work (Figure 2). The immediate job losses are likely to be higher in Cyprus, Greece, Italy, Spain, and other economies where services sectors provide the majority of livelihoods. Over the coming weeks, the share of workers losing their jobs is likely to reach 30%, with little variation across Europe.

Figure 2 Expected layoffs as % of employment in the short and long terms

Source: Authors’ calculations based on survey data from SBIA (2020) and Eurostat.
Notes: Total employment refers to all paid employees and excludes self-employed people.

Many self-employed people are also facing loss of income. At end-2019, more than one in ten people active in the European labour force were self-employed. In Greece, this ratio exceeds 30% (Figure 3).

Figure 3 Share of self-employment in total employment as of 2019 Q4

Source: Eurostat

Policy responses in emerging markets

Countries have responded to the realities of lockdowns with a broad array of monetary, fiscal, and administrative measures. Much of the discussion so far has focused on the broad objectives of the policy response – to provide those affected with the means to stay liquid and solvent (for instance, Dell’Ariccia et al. 2020). We recently surveyed the early policy responses in 38 mostly middle-income economies in Central and Eastern Europe, Central Asia and the Southern and Eastern Mediterranean. These policies have been coded manually in EBRD (2020) based on news reports and cross-checked with the database updated by the International Monetary Fund. Figure 4 presents a summary.

Figure 4 Share of countries that implemented various measures, early April 2020 (%)

Sources: Authors’ calculations based on news coverage, IMF, EBRD (2020).

Note: Based on a sample of 38 mostly emerging market and developing economies in Europe, Central Asia and Southern and Eastern Mediterranean.

Fiscal support to avoid mass layoffs

Fiscal responses have broadly focused on supporting firms and individuals facing a temporary loss of income, and on preventing mass layoffs, with the view to speed up the economic recovery once containment measures are lifted. Most countries provide liquidity support to vulnerable employers, in particular in hard-hit sectors such as tourism (for instance, in Russia and Turkey), or for small and medium sized enterprises across the board (for instance, in Egypt, Georgia and Ukraine). Most countries allowed for the deferred payment of some taxes or social security contributions, many provided payment holidays and/or guarantees and subsidized, often interest-free, loans. To support the banking system at a time when loan repayments may be put on hold, many economies also lowered policy rates and extended various programmes channelling liquidity to banks. Most countries also loosened various prudential requirements.

While these measures can help support vulnerable firms, they may not be sufficient to avoid mass layoffs. Over half of the economies in our sample have pledged to subsidise wages of firms affected by lockdowns, typically as a percentage of salaries (as in Bulgaria or Latvia) and conditional on keeping workers employed. Indirectly, wage subsidies could reach many workers in the formal sector who otherwise could not be paid. As of early April 2020, only around a quarter of countries pledged income support schemes targeting the self-employed.

These measures are most beneficial if implemented quickly so that workers with limited savings can be paid without delay. For this, well-working ways of verifying recipients’ eligibility and administering any pledged support directly into accounts of firms and individuals are key. Some advanced economies have established channels like KurzArbeit in Germany and channel support through KfW, a state-owned development bank. In the UK, the latest indications are that the government scheme for forlorn workers may start paying out wages by end-April, seven weeks into the lockdown. For many middle-income economies, administering such a fiscal response to Covid-19 nevertheless presents a major administrative challenge.

Fiscal constraints appear to be less binding than administrative ones

Countries’ ability to implement fiscal measures to support vulnerable individuals and companies also depends on the fiscal space available. Yet at present, in contrast with many previous crises, the cost of financing has remained low for many economies. If anything, in late March yields on debt of many middle-income economies were below the average cost of servicing debt in those economies in the period 2014-17 (obtained by dividing government interest expenditure by the stock of debt, Figure 5). In sum, administrative constraints may be more binding for many economies than fiscal constraints, at least in the short term.

Figure 5 Emerging market cost of debt, now and then

Sources: Bloomberg, IMF, and authors’ calculations.

Second-best measures where administrative capacity may be lacking

Where administrative capacity to provide well-targeted fiscal support may be lacking, available policies may be less effective, more distortionary, and may even exacerbate the polarizing impact of the crisis (see Adams-Prassl et al. 2020a, 2020b, on the crisis and polarisation). For instance, the population group targeted most by anti-crisis measures across the sample are pensioners (around one in three economies). Traditionally, support to pensioners has been extensively used as a fiscal stimulus measure given its effectiveness, which results from the relatively low propensity of retirees to save and the ease of administering pension increases through monthly payments already set up. This time, consumption is restricted by containment measures, which arguably also affect pensioner’s incomes, but to a much lesser extent than the incomes of salaried and self-employed workers in the services sector.

Faced with administrative or fiscal constraints, policy makers have also turned to measures such as temporary price controls on basic goods (implemented in almost 40% of countries). Countries have also restricted exports of food staples and other products (22%), and, in over half of cases, reduced utility prices or allowed ‘payment holidays’ of utility bills or rents. Price controls are distortionary, can lead to shortages, and tend to reduce incentives to scale up the production of essential staples. But they are easy to implement and, to an extent, protect the purchasing power of low-income households and those who are made redundant. Exemptions from paying bills serve a similar purpose, yet if they have to be maintained for a prolonged period of time, they will not only weigh on the operation of utility companies but may undermine the culture of paying bills on time, a fundamental institution underpinning the smooth running of markets.

This highlights a strong case for setting up systems enabling targeted support such as wage subsidies and transfers to individuals, to broaden the range of effective policy tools available in a crisis. To establish such support systems, economies where access to banking services remains far from universal could decide to grant every company or individual a direct account at a state development bank or a central bank.

References

Adams-Prassl, A, T Boneva, M Golin, and C Rauh (2020a), “Inequality in the Impact of the Coronavirus Shock: New Survey Evidence for the UK”, Cambridge-INET Working Paper Series No: 2020/10, Cambridge Working Papers in Economics: 2023.

Adams-Prassl, A, T Boneva, M Golin, and C Rauh (2020b), “Inequality in the Impact of the Coronavirus Shock: New Survey Evidence for the US”, Cambridge-INET Working Paper Series No: 2020/09 Cambridge Working Papers in Economics: 2022.

Dell’Ariccia, G, P Mauro, A Spilimbergo, and J Zettelmeyer (2020), “Economic Policies for the COVID-19 War”, International Monetary Fund blog.

EBRD (2020), “Covid-19: From crisis to recovery”, Regional Economic Prospects, April.

Small Business Investor Alliance (2020), “Survey of Impact of COVID-19 on Small Businesses”. 

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Topics:  Covid-19 Labour markets Macroeconomic policy

Tags:  COVID-19, coronavirus, workers, Labour Markets, Europe, small businesses

Senior Research Economist, EBRD

Senior Economist, EBRD

Director, Transition Impact and Global Economics, EBRD

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