How pandemic disrupts productivity growth, poverty reduction

Productivity growth, a force that has contributed to lifting millions of people out of poverty in developing countries, will need substantial support from policymakers if it is to withstand the severe challenges posed by the COVID-19 pandemic’s economic shock, a comprehensive World Bank study finds.

A crucial foundation of income growth and poverty reduction, productivity growth has been on a decline globally, and in emerging market and developing economies since the 2007-2009 financial crisis, in what is the steepest, longest and broadest productivity deceleration of recent decades, according to Global Productivity: Trends, Drivers, and Policies.

Evidence from past epidemics and deep recessions suggest that the COVID-19 pandemic could depress labour productivity even further for years to come unless urgent policy action is taken, the study warns.

In Nigeria, the latest Purchasing Managers’ Index (PMI) for the manufacturing sector has continued to reflect the sector’s weaknesses as regards production, new orders, and employment levels.

According to the latest data released by the Central Bank of Nigeria (CBN), manufacturing in the month of June stood at 41.1 points.

As key sectors continue to suffer contraction, unemployment may surge in the economy.

The Vice President, Yemi Osinbajo-led Committee on Economic Sustainability Plan, had warned that about 39.4 million people might be unemployed by the end of 2020, if the government failed to take pre-emptive measures.

The latest figure indicates contraction in the manufacturing sector for the second time, compared to 42.4 and 51.1 index points recorded in May and March 2020, respectively.

Specifically, the manufacturing composite PMI contracted further to 41.1 index points in June (from 42.4 in May), the second consecutive contraction.

The contraction in manufacturing composite PMI was due to decline in new orders index to 36.4 in June (from 42.8 in May 2020), which resulted in lower production – the production index decreased further to 36.6 (from 44.5).

Producers were hit with higher costs of production (input price index rose to 67.2 from 61.4), but were unable to pass on costs to customers (output price index remained flat at 53.2) due to the drop in new orders.

According to the Manufacturers Association of Nigeria (MAN), the lockdown in some states and curfew imposed by the Federal Government continued to have a huge impact on production, while access to foreign exchange for critical raw materials remains challenging.

Supply of raw materials to manufacturers also slowed partly due to the interstate lockdown – supplier delivery time index fell to 60.9 in June (from 65.2 in May).

Given the delay from suppliers’ end, manufacturers stocked up raw materials – raw materials/work-in-progress index moved up, to 41.0 from 37.4, even as quantity of purchases index inched up to 35.8 from 26.3.

“Productivity levels in emerging markets and developing economies remain less than 20 percent of the average in advanced economies, and only 2 percent in low income countries,” said World Bank Vice President for Equitable Growth, Finance and Institutions, Ceyla Pazarbasioglu.

“A possible silver lining may be that changes in behaviour from the pandemic will accelerate the adoption of new technologies, greater efficiencies among businesses, and the pace of scientific innovation. However, it is vital to ensure that these gains are widely distributed and that technology-driven labour market disruptions are well managed.”

The report, first of its kind, draws from a comprehensive dataset covering 35 advanced economies and 129 emerging market and developing economies. It finds factors that have spurred productivity growth, such as working age population growth, educational attainment, and growth of global value chains, have faded or gone into reverse since the 2007-09 global financial crisis.

Furthermore, the collapse of global trade and disruptions in global supply chains during the current pandemic, if prolonged, could be particularly damaging to prospects for productivity growth among emerging market and developing economies, the report finds.

While emerging market and developing economies have historically lagged advanced economies in productivity levels, falling poverty rates in recent decades had been an encouraging sign that some of these economies had made productivity and income gains.

Convergence to higher productivity levels has been associated with factors including greater political stability, better education systems, diversified economies, and integration into global supply chains. However, the current drop in global manufacturing, slower trade growth, erosion of human capital, and weak outlook for commodity prices may make closing the gap harder, the report finds.

“Even prior to the COVID-19 pandemic, there had been a broad-based slowdown in productivity growth,” said World Bank Prospects Group Director, Ayhan Kose.

“This indicates that any policy package to rekindle productivity growth needs to be similarly broad-based. A comprehensive policy package should spur investment in human and physical capital, encourage reallocating resources to more productive sectors, foster technology adoption and innovation, and promote a sound institutional and macroeconomic environment,” Kose added.