By George Manzano and Nikka Pesa

BUSINESS will be tough in the aftermath of the lifting of the thrice extended lockdown. In the immediate aftermath of the Enhanced Community Quarantine (ECQ), commerce would get a boost as consumers splurge in their drive to satisfy their pent-up demand. However, such spending would wind down eventually as consumers preserve whatever savings they have left as a cushion for the uncertainty of the post ECQ world. Purchases of big-ticket items would likely be postponed while spending on the basic necessities would be the order of the day. The purchasing power of the multitude of the daily wage earners, already decimated by the lack of opportunities to earn during the lockdown, would be very weak. Remittances, a dependable source of income that fueled many years of consumption-led growth, is expected to falter as recession grips the global economy. All told, consumer confidence will plunge given the massive unemployment that is expected to unfold.

The prospects of businesses are even starker. Throughout the ECQ, many companies have been bleeding cash as they continue servicing their payroll and overhead despite missing out on revenues. In addition, businesses will have a difficult time bouncing back as elements of their supply chain, often spanning several countries, are in disrepair. The simultaneous lockdowns across supplying countries, especially China, means that the raw material and supplies that feed Philippine industries would not be easily forthcoming. Moreover, traditional drivers of growth and employment such as the tourism, transportation and other service industries are in tatters.

The Philippine economy is no stranger to shocks — both natural and man-made ones. Time and again, the economy managed to address the damage inflicted by localized shocks such as typhoons Yolanda or Ondoy, and those coming from external sources such as the global financial crisis of 2008. However, the particular economic crisis that the pandemic unleashed has an additional, even more pernicious element, that puts a drag on the pace of economic recovery. This is an element of fear which not only deflates consumer confidence but prevents the economy from operating at full capacity.

PERNICIOUS ELEMENT
Where does this fear arise? It comes from the nature of the transmission of COVID-19. A practical way of avoiding contracting the virus is to steer clear from persons who manifest the symptoms of the disease. This is a natural defensive reaction since the symptoms are observable. However, there are issues when dealing with asymptomatic virus carriers. Because these individuals do not manifest symptoms, they may unwittingly infect the others as they go about their daily lives. These asymptomatic carriers are difficult to identify, leading to the latent suspicion that there is a chance that every stranger is an asymptomatic carrier.

As a general measure to prevent infection, physical distancing is recommended. In principle, the greater the distance, the lesser the risk of infection. While the measure is necessary and correct from a public health policy perspective, however, from the business standpoint, the practice can be very costly. For one, firms have to spend money on retooling and retrofitting the office and factory floor layout to allow distancing. This is a set up cost that is incurred only once. However, there are other repercussions from physical distancing.

There are certain markets, especially in the services segment, whereby the very nature of the transaction, makes physical distancing impossible. These are termed “high contact intensive” industries marked by face-to-face interaction between service provider and consumer such as food services, hair salons, and dentists. Since the technology of such industries are not likely to vary across countries, a survey* in the United States can be indicative of the same sectors in the Philippines that could well be negatively affected by the imposition of rigorous physical distancing restrictions. The fact that workers from these industries are less likely to have possibilities for working remotely will compound the problem.

There are other factors at work that bode ill for these sectors. The more obvious case is that cash-strapped customers, recently emerging from the ECQ, can hardly afford to spend on such services. Even more alarming, people do not want to avail of such services due to fear of infection. As customers shy away, demand is driven downwards leading to even less revenue. The prospects of business closures from such sectors can set back the pace of economic recovery.

How many of these service providers belonging to the “high contact intensive” sectors will be negatively affected by the fear factor? Following Leibovici et al (2020), a distinction is made between “high contact intensive” sectors belonging to the essential services in pandemics such as health services and the non-essential ones. The more vulnerable sector would be those offering non-essential services. Extracting the employment figures from the Annual Survey of Philippine Business and Industry, service providers belonging to the affected non-essential services account for to 29% of total employment in the Philippines in 2015 or around 1.28 million**. This cohort of workers earned around P3 trillion in 2015. In terms of share to employment, the biggest subsectors are in the elementary and secondary education services, and the food and drinking services such as restaurants or cafeterias.

For the National Capital Region (NCR), where the lockdown is most intense, these aforementioned service providers comprise around 24% or a quarter of total employment in 2015 or around 508,000 workers***. Similarly, these NCR-based service providers earned around P1.85 trillion in 2015. The subsectors with the biggest shares of employment are the food and drinking services, and the security and investigation services such as security guards.

One notes that the number of workers whose jobs are vulnerable to the fear factor is quite sizable. Unless addressed, these workers are likely to suffer loss in income, as demand for such services could shrink. The Table reports the breakdown of the essential and non-essential sectors of the “high contact intensive” industries for NCR and the Philippines.

THE ECONOMIC COSTS OF THE FEAR FACTOR
Though the fear factor may have psychological roots, it is an economic problem. It is a variant of “information asymmetry,” or more specifically, the “problem of lemons” that could cause markets to fail. Because reliable information is absent or hard to come by, everyone will suspect that the person — co-worker, client, service provider, etc. — could be a potential carrier. Given the perceived risk, they will forego the transaction, leading to a loss of potential business. For example, because the customer does not possess information about the state of health of the service provider — a Grab driver or a hairdresser — he or she shies away and a potentially productive transaction is aborted, even if the service provider is perfectly COVID-free. As a consequence, a lot less business will be consummated in the post ECQ period, as many customers assume that service-providers are carriers, or “lemons.”

One of standard remedies when markets fail due to asymmetric information is to provide some sort of “signaling.” Customers may struggle to find out which service provider is COVID-free. Similarly, service providers may find it hard to convince their prospective clients that they are healthy. To resolve the issue, service providers can signal the state of their health. A certificate of having been tested and found negative of the virus could be used as an instrument for signaling. Alternatively, a record of thermal scan readings for the past 21 days could likewise be employed.

Signaling, alas, only works if it is credible. If the reliability of the current testing procedures in detecting asymptomatic carriers at all times is questionable, then the certificates of testing may not be very useful as a signaling instrument. Rapid antibody tests procedures are still undergoing trials and have not yet been certified by the health authorities as standalone screening instruments. In addition, if the service provider cannot assure that integrity of the ecosystem where he or she operates — the residential community, the grocery, those bringing kids to school, the commute, etc. — is “safe,” then possessing test certificates of health may not be very convincing signaling instruments. Given the absence of credible signaling instruments to date, the fear factor will continue to hound the aforementioned service sectors.

The “new normal” that is being bandied about for post ECQ life is fraught with hard trade-offs. The trajectory of the economic recovery will not be easy for a number of reasons. First, consumer confidence is already low given the loss of income. And the looming unemployment will drag it even lower. Second, the “fear” factor arising from the risk of infection will dissuade many consumers from consuming services especially from the high contact intensive service sectors. Third, physical distancing will prevent the factories from ramping production to higher levels.

In the absence of a credible signaling instrument, that could mitigate the fear factor, the high contact service sectors would face a very difficult path to recovery. These service sectors would therefore need government assistance. That a good number of these sectors are Micro Small Medium Establishments (MSMEs) , which are more fragile during lockdowns, makes the call for assistance more urgent.

* Leibovici, Fernando, Ana Maria Santacrue, Matthew Famiglietti (2020) “How the Impact of Social Distancing Ripples through the Economy,” On the Economy Blog, Federal Reserve of St Louis. Downloaded from https://www.stlouisfed.org/on-the-economy/2020/april/impact-social-distancing-ripples-economy

** This refers to the employment of establishments with 20 or more employees.

*** This refers to the employment of establishments with 20 or more employees.

George Manzano and Nikka Pesa are from the UA&P School of Economics. This piece is from a UA&P BEC Staff Memo from May.