How to shield people from price shocks
Inflation is now the number one enemy for many developed and developing economies, and it is creeping in Bangladesh too. Soaring prices are eating into the earnings of low-income people who were just recovering from the pandemic losses. The news of per capita income exceeding $2,800 does not bring them any relief as their earnings are barely enough to feed the families. Now, what needs to be done is for them to be shielded from price shocks.
This is what economists have stressed during conversations with The Business Standard's senior reporter Jahidul Islam.
Low-cost food for 1cr families was a good step
Dr Mustafa K Mujeri, executive director, Institute for Inclusive Finance and Development (InM) and former director general of BIDS
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If the price of goods increases and wages remain unchanged, the real income of the people decreases. This is because if the price goes up, less is available even when spending the same amount of money as before.
When food prices rise, the difficulties of low-income earners is exacerbated, as now they have to spend an even larger portion of their income to buy food.
While the demand for other products can be reduced if prices rise, the same cannot be said for food. As a result, people are forced to continue buying food, while reducing consumption costs in other areas.
During the closure of factories amid the Covid-induced lockdowns, many people lost their jobs. In addition, self-employed people also suffered great losses due to the pandemic. The loss of income pushed many people into poverty.
When the Covid-19 outbreak subsided, the economy began to recover. Large industries were rapidly picking up steam. Meanwhile, the poor managed to recover income by joining other professions or running small businesses. But the rising food prices are undermining all efforts.
If this situation persists, more people will be affected and there will be a drastic reduction in their quality of life.
The government can help the poor in various ways. It provided low-cost food to one crore families during Ramadan through the TCB. That was a good initiative, which helped the needy by giving them some relief.
But the reality is that we still have glaring inefficiencies in the distribution of benefits under social security programmes. Many times those who weren't supposed to get the benefits are enjoying those while the real poor are being deprived. The government has to find a way to correct all this mismanagement.
Alongside such programmes, sustainable employment needs to be created to increase the long-term income of the poor. Disasters will come, one after another, but temporary measures for dealing with those can never be desirable.
Our capacity to deal with the risks to and uncertainties for the poor people needs to be increased. Smooth sailing cannot be expected in the country at all times.
Food production may be disrupted due to natural calamities in the country. Again, the price of water may increase due to various global reasons, including war. The government will have to take short-term and long-term initiatives to alleviate the plight of the poor.
Govt needs to be a market player, not regulator
Dr Zahid Hussain, former lead economist, the World Bank
Although Bangladesh is seeing a 6% increase in the Wage Rate Index compared to the same period last year, the real income of the working class has neither increased nor decreased. Low-income earners are seeing the wage increase offset by a close to similar level of inflation.
There also exists inequality in the wage increases of different sectors. Where employment is highest, the wage rate increase is less.
Fisheries workers have seen their wages grow by much less than the rate of inflation. Wages in the industrial sector, especially in construction, have been steadily declining. Where wage rates have risen sharply in the manufacturing sector, it has seen a steep fall in employment.
It is important to note that most workers in the country are employed in the agriculture, construction and informal services sectors. Given the 6% Wage Rate Index given by the Bangladesh Bureau of Statistics, it would not be wholly off the mark to say that poverty is rising despite an increase in wages in some instances. At the same time, the situation could have been much worse if the wage rate had not also slightly risen.
To better grasp how many people are falling into poverty due to inflation, or rising prices, one only has to look at who is most vulnerable. There are a number of people in the country who are slightly above the poverty line, but also not poor.
According to data from the World Bank in 2017, 55% of people made up this rather precarious group. And now with the rise in commodity prices, the poverty rate has only increased. This is because as price increases, so does the incidence and the depth of poverty.
In 2016, in Bangladesh the poverty gap - the extent to which individuals on average fall below the poverty line - was 5%. This means that the average income of the poor was 5% lower than the poverty line. Now that the poverty line has expanded, the already poor will be getting poorer.
In simple terms, the non-poor are getting poorer because of inflation, while the poor too are getting even poorer.
The first way out of this situation is to bring inflation under control. The second way is to increase the incomes of the poor and those at risk of poverty.
A number of programmes can be used to increase the purchasing power of the poor, such as cash transfers and food aid.
If the beneficiaries for such programmes can be selected on the basis of accurate information, the lives of many could be made easier. Unfortunately, the reality is that many of those near or beyond the poverty line are not getting the benefits of the government's social security programme. Many among the rich, on the other hand, are profiting off the benefits of the scheme.
In addition to having a macro-policy in product price control, I think there are many benefits to being able to intervene at a micro-level as well.
Isolated operations in different markets and subsequent arrests will not restore order to the market or bring it under control.
If possible, the government needs to sell products which are seeing abnormal price hikes, forcing the traders to reduce their prices as well.
The model exists with the Trading Corporation of Bangladesh (TCB), which sells commodities at a low price. But even there, the question must be raised why the TCB sales fail to have any impact on the market prices. In my opinion, it is because the TCB sells food at low prices but for a very short time.
Apart from that, the supply by TCB is quite less compared to the market demand. There are also allegations of inefficiency in management, alongside various kinds of irregularities.
Therefore, in order to bring prices down to a tolerable level, the government has to adopt the role of a market player instead of a regulator. If the government has good stocks of food products then traders will fear that those would be released if price is hiked abnormally. No one will want to increase prices then.
Expand safety net programmes
Dr Mohammed Abu Eusuf, executive director, RAPID
Poverty and commodity prices share an intrinsic relationship. The poverty rate is determined according to the costs of basic needs.
If income does not increase at the same rate as the price of goods and services, people will fall below the poverty line anew. This is identified as transitory poverty. Some vulnerable people are always on the brink of poverty. If there are any income or price shocks, then such people fall into poverty again. When the situation normalises, that is, if income increases or prices are stabilised, they return to their previous state.
So these people constantly fluctuate between being above and below the poverty line at different times.
Now, during the times of rising inflation, such people are again falling into a state of poverty.
According to my estimations, at least 20 to 25% of the people living below the poverty line in Bangladesh are at constant risk of poverty. Thus, if there were 100 people in poverty during normal times, then that number has now risen to 125.
As the number of poor people increases, government initiatives to temporarily alleviate poverty should be expanded at the same rate.
Now that the government is seeing that most people are suffering due to rising commodity prices, it has given utmost importance to market control.
The open market sale is being expanded by the government, but this should be done in such a way that the working hours of the beneficiaries are not wasted.
Many people have to stand in line for hours to get TCB products. Working people do not have time to stand in line and buy TCB products.
It can also be seen that different products are being distributed in TCB packages. But many may need only oil and not dates or grams. The poor should be given respite from such technical complications.
Rice or food-friendly programmes at the rate of Tk10 per kg should be expanded for the most destitute and helpless people.
Considering the time of emergency, the number of beneficiaries of social security programmes and the per capita allocation should be increased in the budget of the next financial year.
Increase cash support, TCB food sales
Sayema Haque Bidisha, professor of economics, University of Dhaka
Say a family buys 20 kilogrammes of rice per month. But when the price of rice increases, this family will be forced to buy less rice than before. While they may not have been considered as poor before, now they will be as their consumption is less than their demand. This is how many non-poor families fall into poverty due to rising commodity prices.
Such a family may continue purchasing the same amount of essential commodities, but they will have to reduce their savings or take loans. Even if the temporary needs are met, there remains the risk of falling into long-term poverty by losing land or other resources in the future.
We have been talking about people recovering from the Coronavirus outbreak, but how this has been happening has not been discussed much.
The recovery phases of a big industrialist and a working man can never be the same. Someone poor may have lost a large chunk of their savings, or had to sell a piece of land in the village, to survive. Again, many might have fallen into a cycle of borrowing from NGOs. If this becomes their only means of affording consumption, there is a risk of them falling into poverty in the long run.
If a person is forced to buy less than before because of rising commodity prices, that is, if they cannot buy the necessary goods without resorting to loans or savings, then that person will be considered as poor.
The reality is that while our country may not be poor, it still has a very high number of people living just above the poverty line. All they need is a small shove to fall back into the cycle of poverty.
In my own research, I found that 15.08% of the people in Bangladesh are in the vulnerable non-poor category. Any kind of shock, including income, employment, or rising commodity prices, actually pushes such people into poverty. As a result, the poverty rate has increased from 23.95% to 39.03%.
No one alone is responsible for the recent rise in commodity prices. Furthermore, the government alone does not have the capacity to control the entire market. Under these trying circumstances, the government still has the opportunity and the obligation to strengthen the purchasing power of the people.
First of all, we need to expand the food supply programme using the discounted prices given by the TCB so that all of the needy can come under this facility. With the national budget in mind, programmes such as food-friendly programmes and cash assistance for the needy need to be expanded in such a way so as to increase the number of beneficiaries and per capita allocation.
Increasing the scope of cash assistance will enable the poor to cope with the impact of inflation and sustain their livelihood. On the other hand, if people's purchasing power increases, investment, employment and income will also increase through increasing aggregate demand.
