Commentary on Political Economy

Wednesday 30 December 2020



Five ways the pandemic is making the world less equal

Many billionaires benefited from rising asset prices, but workers, the young and developing economies have been hit hard © FT montage; Dpa

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The coronavirus pandemic is worsening global economic inequality in an array of ways, both geographically and socially.

As the first vaccines roll out, the spread of the virus is expected to decline in the coming months — but its economic impact is likely to linger, economists warn.

In a recent interview, Nobel laureate Angus Deaton said that rising inequality has “a lot has to do with jobs”; restrictions on activity that were introduced to combat the pandemic have hit poorer workers particularly hard, driving the greatest loss of global output in modern history.

As a result, the IMF estimates that income inequality rose more sharply in 2020 than it did in previous economic and financial crises.

Because the pandemic has increased inequality between nations, as well as between households, a decade of progress in reducing inequality has been wiped out in developing economies, according to the IMF.

1) Poor workers are becoming poorer

About 600m people work globally in the hardest-hit sectors such as hospitality and retail, according to the International Labour Organization.

These sectors contain particularly high proportions of women, ethnic minorities, migrants, the low-skilled and the young; they also tend to pay poorly.

Line chart of Million of people* showing Pandemic reverses long-term fall in extreme poverty

Sebastian Königs, labour economist at the OECD, said that “more vulnerable labour market groups — notably the low-skilled and workers in non-standard jobs — have been most strongly affected by job and earnings losses so far” which could “further increase existing wealth inequalities”.

Bar chart of % of population reporting worse financial situation than a year ago (December), by income level showing The pandemic has hit those on low incomes hardest

In addition, the informal economy has been hard-hit — and that is where some of the world’s most vulnerable workers are employed. About 2bn people around the world work informally, with limited access to social protection or benefits.

Their loss of income is one of the driving factors behind the World Bank’s forecast that the pandemic will push up to 150m more people into extreme poverty by 2022.

2) Inequality between countries is rising

Inequality between nations has also increased. Poorer countries went into the pandemic with less well-resourced healthcare systems and many have been hit by lost tourism revenue, lower remittances from citizens working abroad, collapsing exports and rising public debt.

Rich countries have been better able to protect their economies from the effects of the pandemic by boosting public spending, leaving developing economies to struggle without the kind of co-ordinated global action that was prompted by the financial crisis over a decade ago.

As a result economist Joseph Stiglitz recently warned that the pandemic “has exposed and exacerbated inequalities between countries just as it has within countries”.

Column chart of Covid-19 related fiscal measures, by type of economy (% of 2020 GDP) showing Richer countries can spend more to support their economies

Also, the pandemic-induced escalation in the pace of technology adoption around the world “risks widening the gap between rich and poor countries by shifting more investment to advanced economies where automation is already established”, according to Cristian Alonso, economist at the IMF.

And in the coming year, differences in access to vaccines is set to add to the divide.

3) The generation gap is worsening

Older people have been far more vulnerable to the health effects of coronavirus — but in most countries younger people are bearing the brunt of the economic damage.

At the height of the pandemic-induced surge in unemployment, joblessness among people aged 15 to 24 in OECD countries was 7.5 percentage points higher than the start of this year, whereas among those aged 25 and over it rose by 3.2 percentage points.

Line chart of % of workers in OECD countries, by age showing unemployment among the young has risen fastest during the pandemic

Pandemic-induced job losses have potentially long-lasting consequences: people who start their career during a recession experience lower earnings for a decade after graduation and report lower self-esteem, commit more crimes, and distrust government more, according to research by Hannes Schwandt, assistant professor of economics at Northwestern University in the US.

The ILO has warned that “exclusion of young people from the labour market” is “one of the greatest dangers for society in the current situation” because of “the long-lasting impacts”.

4) Well-off workers stay comfortable

Around the world, relatively privileged workers have avoided the worst of the pandemic’s economic impact. For example many office workers have been able to shift to homeworking, and for them, lockdown meant reduced spending on transport and leisure while their incomes remained relatively stable.

Up to 40 per cent of those in the ILO’s top income bracket were able to work from home during the pandemic, more than double the proportion among the lowest earners.

And in many countries, as jobs in lower-skilled occupations were cut, the number of professional jobs increased.

Line chart of % of household income showing saving rates soared in 2020

As a result household saving rates have soared in many countries; there is some research to indicate the rise was driven by high earners. Meanwhile lower income people have had to use savings to help pay their bills.

“The poor are getting poorer,” said Gita Gopinath, chief economist at the IMF.

She has called on governments to do more to help workers reskill and move into growing sectors, in order to avoid the pandemic leaving a long-lasting legacy in the form of entrenched global inequality.

5) The rich get richer

The 10 richest billionaires in the world increased their wealth by $319bn in 2020, with technology billionaires accounting for the vast majority of the gain, according to research by Bloomberg. Much of this is to do with rising asset prices; the MSCI global stock index is up 12 per cent since the start of the year.

This was fuelled partly by the success of companies that have experienced a demand boost because of the pandemic, but also because central banks’ efforts to cushion the unprecedented slowdown in activity by pumping massive waves of stimulus into the global economy helped drive up asset prices.

Line chart of MSCI indices, rebased showing Global stock prices in some sectors have soared

Chuck Collins, of the Institute for Policy Studies, said that billionaires’ wealth “is surging” and “many of them are profiting from our increasing dependence on cloud-based technologies, online retail, drug research, telemedicine, videoconferencing — services that have become essential services during the pandemic”.

For example, the combined wealth of Amazon’s Jeff Bezos, Tesla’s Elon Musk and the vaccine producer Zhong Shanshan has increased by more than $275bn since the start of the year, according to Bloomberg.

Although some sectors of the economy such as retail and hospitality have been damaged by the pandemic, and wealthy individuals have suffered from this — Spanish retail magnate Amancio Ortega lost $10bn according to Bloomberg — the overall effect on billionaires’ holdings was limited.

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