For the urban poor, trade may be the only lifeline during a pandemic
Trade routes have been significantly disrupted with the onset of the COVID-19 pandemic. As formal firms reel under the consequent demand and supply shock, the urban poor engaging in informal trade with little social protection have been pushed further into the margins, and are struggling simply for survival.
The outbreak of the plague in Surat, India in 1994 claimed 56 lives and cost the Indian economy approximately 3 billion USD. The latter was a consequence of the world cutting trade and travel ties with India for fear of contagion. The present pandemic has rekindled similar fears and governments have implemented varying degrees of restrictions – in many cases, a full closure of borders to movement of people, and in some cases even for goods.
This is contrary to the World Health Organisation’s (WHO) recommendations that have advised against restricting travel and trade given the economic disruptions such policies lead to. The devastating economic effect of these restrictions is already showing that in 2020, global growth and growth in sub-Saharan Africa are set to contract by -4.9% and -3.2% respectively.
This will get worse with continued lockdown restrictions. The World Trade Organisation (WTO) has warned that at worst, global trade could collapse by a third this year, and at best, by 13%, similar to the recorded drop after 2009 financial crisis. This has fundamental consequences – both direct and indirect – for many. For instance, within the first few weeks in March when trade routes began to be suspended, flower exports from Kenya to the European Union fell by 50%, adversely affecting around 1 million people.
Trade enables formal firms to flourish, which will be key for a post-pandemic recovery. But it is also crucial to remember that they aren’t the only ones: the urban poor that informally contribute to the economy, are acutely dependent on trade as well. The continuation of trade is even more essential for their survival as, whether in the midst of a pandemic or not, they operate without any adequate safety net. Import disruptions, which have resulted in shortages, including of food, have spiked prices, and brought economic hardships for these small traders and consumers across the continent.
Firms, productivity, and post-pandemic economic recovery
A study on formal firms in Uganda found at the start of their lockdown, compared to a year earlier, exports fell by 57%. Furthermore, imports, which these firms rely on to produce fell by 43%. The researchers of this study simulated what would happen with continued import reductions of this magnitude, and the results are devastating: 6.6% of all formal firms in the Ugandan economy would likely have to close, resulting in a reduction of formal employment by 4.7%. Fortunately, the Ugandan government, throughout its lockdown, ensured trade could continue, and exports as well as imports started to rebound relatively quickly.
It is not only formal firms in Uganda that faced these disruptions. As a survey of firms in Ethiopia revealed, trade disruptions affected 20.7% of small, medium, and large firms due to a lower supply of raw materials and intermediate goods and 32.5% by restricted movement of workers.
However, for a post-pandemic recovery, it is these firms that will be critical in supporting economic growth. The more productive firms are, the faster countries will recover. Evidence suggests that in sub-Saharan Africa the labour productivity of formal firms is four times higher than that of informal firms. This is because formal firms are able to scale and specialise in a way that informal operations cannot. In addition, taxes on incomes, profits and capital gains accounted for around 25% of all national tax revenues.
But these firms do not operate in isolation. In fact, some of the most productive firms are located in cities, not only because clustering together can spur ideas and innovation, but it also brings them closer to their markets. And as our world becomes increasingly globalised, many of their supply-chains are reliant both on imports for production as well as markets for export. This is why globally, the countries most affected by the current economic crisis are those at the centre of global value chains. When we shut off connectivity to limit the spread of disease, we also shut down the very thing that enables firm productivity.
In the urban informal sector, firms have a very different profile
In developing cities, the majority of firms are not large or in the formal sector, however. The informal sector actually provides more than 66% of employment across the continent. A 2016 census of informal firms in the Greater Kampala area showed that informal firms are very small: approximately 60% only have 1 employee and 70% have an annual turnover of UGX 10 million (US$ 2,700) or less. More importantly, already in 2016, 93% of these firms were operating close to or at the poverty line.
The challenge is for those firms operating close to the poverty line in cities, is that a large part of their income is used to buy food in urban markets. Therefore, trade is not only a question of economic activity but more importantly of survival. It is also why the urban poor are the hardest hit by lockdown measures.
Evidence from a small-scale trader survey in Lagos showed that during the lockdown, most of these firms were making zero revenue. Furthermore, these effects are persistent: in Sierra Leone, for example, where the economy has re-opened, profits for these firms are still nearly 50% lower than pre-lockdown levels.
In Uganda, which has by some estimates already eroded nearly 10 years of gains in poverty reduction efforts, the sharpest spike in poverty levels to date was in the capital city Kampala. It is also why there have been increases in hunger and child malnutrition across the country. Uganda is not alone: simulations of an eight-week lockdown across Africa show that eight million people, including 3.9 million children under five years, would be severely food-deprived.
Trade is not a luxury that can be temporarily avoided
Given the scale of the current pandemic, however, the WHO is now rethinking whether some disruptions in the global trade and travel may be warranted to contain the virus. Rethinking global guidelines on handling pandemics is not an easy task given that the contexts to which they will be applied to are extremely diverse. Targeted, data-driven, flexible and localised approaches to containment measures are therefore the most efficient.
Understandably, however, during this pandemic and for future ones, much of the world also looks for global standards set by bodies like the WHO. When setting these standards it is important to remember that for many, health versus the economy is a false dichotomy. Rather, in poor urban areas, trade is not only a means of making ends meet but of avoiding the trap of poverty and hunger.
This blog is part of a series curated by the Cities that Work initiative exploring topics on cities and the ongoing COVID-19 pandemic. Read more.
Editor’s note: A version of this article appeared in The Conversation.
Disclaimer: The views expressed in this post are those of the authors based on their experience and on prior research and do not necessarily reflect the views of the IGC.