Tackling MCO's economic paradox and its aftermath

One paradox of the social distancing measure brought about by the Covid-19 pandemic is the implosion or collapse of all economic activities.

This can be seen when restaurants and eateries are shutting while delivery services, like Amazon, are going through the roof and are still falling short of demand, leading to what senior research fellow at the Blavatnik School of Government, Oxford University, Dennis Snower described as the “great economic mismatch”.

This opens up a vista of new economic landscape that requires us to rebuild and reimagine all the present jobs available now amid the Covid-19 crisis.

It also calls for the government to lead the way to restart the economy during both the movement control order (MCO) and its immediate aftermath by addressing this economic paradox.

This, in turn, entails the adoption of a two-pronged strategy – invest in public health and, at the same time, invest in diversifying our global supply chains, making them less reliant on physically integrated processes as opposed to the physically fragmented ones.

In implementing this strategy, the first order of business is to map out and ascertain which industries are physically interactive in their production and distribution processes and which ones are physically disjointed or fragmented that lend themselves well to an environment of MCO and pandemic with their concomitant social distancing measures.

The former should be assisted via a slew of policy measures in transitioning to a production and distribution processes that are physically fragmented while the latter needs to be assisted in consolidating their new-found physically fragmented production and distribution processes.

The first part of the strategy could take the form of government incentives and assistance for businesses bold enough to retool their production systems towards a physically fragmented process to manufacture the almost-scarce essentials to protect us against the invisible virus. Such items are face masks and personal protective equipment (PPE) which are in dire shortage, given our high dependency on the import of these products.

This way, Malaysia not only can mitigate the shortage of supply, as there are only a few major manufacturers in the country, but also manufacturing it with an eye for the world market which will bring much needed foreign exchange. These products are in a shortage everywhere.

Every country is talking about this – the need to manufacture these products domestically – but only the first-mover country will be richly rewarded.

Also, giving generous grants or funding for research and development activities to deserving universities and private research companies to produce test kits for Covid-19 that could yield accurate result within 24 hours.

On the second strategy of diversifying our supply chains, the issue here is not so much due to a drastic decline in aggregate demand, as was the case in all previous recessions especially the Great Depression of the 1930s.

Rather, it is the twin phenomenon of a dramatic fall in the existing production and consumption of goods and services that rely heavily on processes that require physical contact (such as hotels and restaurants), combined with an equally dramatic rise in the production and consumption of goods and services that don’t involve such contacts (such as Amazon and Netflix).

No wonder Jeff Bezos, CEO and founder of Amazon, saw his wealth grow by US$24 billion (RM104.88 billion) since the world’s been largely in shutdown which brings his net worth to US$143.1 billion, nearly US$40 billion higher than second-placed Bill Gates, and almost twice that of Warren Buffett.

Since many sectors that depend on existing production and distribution processes that are highly integrated physically are shedding workers, while others that are physically fragmented are unable to hire enough, there is no point in saving jobs in the former sector.

Instead of pouring billions of ringgit into preserving jobs that have disappeared, a fraction of these funds should be used to promote the requisite adjustment of labour and product markets.

This is because Covid-19 is the first pandemic to have struck a thoroughly integrated global economy. Most goods today are products of a global supply chain, where physical interactions in one location are connected to physical interactions elsewhere.

Stop the physical interactions in one place, and the economic fallout is felt in many others.

Higher government spending, lower taxes, rock-bottom interest rates, and even printing money may keep people afloat in the short term, but these do not stimulate productive activity when people cannot work.

Nor will supplementing the incomes of the newly unemployed necessarily shore up consumption when most shops are closed and delivery services are unable to meet the exploding demand.

To deal with this new economic crisis, we need to encourage people to leave the jobs that have already been destroyed and take the jobs that are being created. For this purpose, active labour market policies are called for.

Instead of spending monies on making up for wages, salaries, and self-employment incomes generated by work that no longer exists and won’t exist for a long time – since this pandemic has a long way to go before an effective vaccine reaches the public or the natural immunity of humanity sets in – governments should be subsidising the movement from the imploding sectors into the exploding sectors.

Hence, hiring and retraining subsidies, relocation benefits, and investment credits for transforming production processes from physically integrated to physically fragmented activities would be the way to move forward.

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JAMARI MOHTAR is director, media & communications at Emir Research, a think- tank focused on strategic policy recommendations based on rigorous research. - Mkini