Physical distancing will be ‘very costly’ for some firms

By Marissa Mae M. Ramos
Researcher

COMPANIES that rely on face-to-face interaction are likely to be more negatively affected by the implementation of physical distancing measures than other sectors, as fears over the coronavirus disease 2019 (COVID-19) persist, according to economists from the University of Asia and the Pacific (UA&P).

In an unpublished paper titled “Consumer Fear in a Post Quarantine Economy,” UA&P economists George N. Manzano and Nikka C. Pesa said while the practice of physical distancing is necessary from a public health policy perspective, the practice can be very costly from a business standpoint.

“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,” they said, adding that firms offering non-essential services are even more vulnerable as consumers are expected to delay making these purchases.

They noted that among establishments with 20 or more workers, firms that provide non-essentials employ around 1.28 million Filipinos, or 28.5% of the country’s total employment, citing the Philippine Statistics Authority’s (PSA) 2015 edition of the Annual Survey of Philippine Business and Industry. On the aggregate, these firms earned approximately P3 trillion that year.

In Metro Manila alone, around 508,000 workers or 24% were employed in this group with total income amounting to P1.8 trillion.

Mr. Manzano and Ms. Pesa’s paper follows the analysis of economist Fernando Leibovici and colleagues at the Federal Reserve Bank of St. Louis in the United States where they distinguished industries that produce essential services during the pandemic such as health services, from those that do not.

Among industries identified as “high-contact intensive” but providing non-essential services were personal care; outpatient healthcare; food and drinking places; amusement and recreation; and tourism-related industries such as transportation and accommodation.

“The fact that workers from these industries are less likely to have possibilities for working remotely will compound the problem… The more obvious case is that cash-strapped customers, recently emerging from the ECQ (enhanced community quarantine), can hardly afford to spend on such services,” the UA&P economists said.

“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 lesser revenues.”

INFORMATION ASYMMETRY
This “fear factor” stems from the problem of information asymmetry, which arises when one party has more information than the other.

“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 forgo the transaction leading to a loss of potential business,” Mr. Manzano and Ms. Pesa said.

One remedy to this problem, they said, is through “signaling.”

“[S]ervice 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,” they explained.

However, even this may prove problematic if signals are not 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… In addition, if the service provider cannot assure that integrity of the ecosystem where he or she operates… is ‘safe’, then possessing test certificates of health may not be very convincing signaling instruments,” they said.

“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, and medium establishments, which are more fragile during lockdowns, makes the call for assistance more urgent.”

The country’s gross domestic product (GDP) shrank by 0.2% in the first quarter — the first time in 21 years or since the fourth quarter of 1998.

The services sector contributed 0.81 percentage point (ppt) to GDP performance during the period to partially offset the negative contributions of agriculture and industry at minus 0.04 ppt and minus 0.93 ppt. Nevertheless, this paled in comparison to its contribution of 4.16 ppts in the first quarter last year when the economy grew by 5.7%.

The cabinet-level Development Budget Coordination Committee now expects GDP to shrink by 2% to 3.4% this year, lower than the -1% to zero growth forecast made in late March.