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Decades of progress raising living standards and reducing poverty have been replaced by increasing food insecurity and inequality.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%, and if discouraged workers added, this figure could increase to 43%. 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% of GDP and employ 47% 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.

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