Covid-19 and the rich-poor divide

How will Covid-19 change the world? Thomas Friedman, The New York Times columnist, has suggested recounting time as BC, standing for Before Corona, and AC, standing for After Corona. Will AC globe be very different from BC globe? Will it price better the public health risks, a major shortcoming of BC economies irrespective of political systems? Will it prod collective action to bridge the rich-poor divide, a critical shortcoming of BC social contracts?

These are open questions which only history, currently in the making, can answer. That AC economies will be different from BC economies is a no brainer. That the players calling the shots may change is nearly so. The key question, however, is whether the game will change. You cannot build resilience to debilitating viruses and human deprivations without changing the game.

In their book Why Nations Fail, Daron Acemoglu and James Robinson (AR) argue that political institutions rather than economic policies, geography, culture, or value systems explain the success or failure of nations. There are "extractive" institutions in which a "small" group of individuals do their best to exploit the rest of the population, and "inclusive" institutions in which "many" people are included in the governance process. Inclusive institutions enable innovation, leading to continuing growth and shared prosperity. Amartya Sen had argued decades ago that they also handle better destabilizing natural shocks. Extractive institutions deliver growth when the economy is "catching up" to the technological frontier. The benefits of growth are distributed very unequally within and across generations. They fail when innovation is needed to push the frontier in times of prosperity and adversity.

The evolution of institutions in any nation depends on the intrinsic randomness of history. Many small unpredictable incidents or small differences in initial circumstances can lead to either inclusive or exclusive institutions though a cumulative process. Covid-19 has put in place a natural experiment in which a small virus from a Chinese seafood market has disrupted nations in ways unprecedented in human memory. This is a one shock, all systems experiment.

How are nations adapting and responding to the virus? Social distancing is one key adaptation which has changed the way we work, produce, consume, transact and socially interact. Will this be a game changer?

As indelible as the virus may seem now, collective memories tend to be short. When an almost perfect drug to treat COVID-19 is in the market, or when almost every person on the planet has been vaccinated against coronavirus fairly quickly, say within the next couple of years, social distancing will no longer be needed. Life may then eventually return to the BC path after a temporary deviation. There may be a psychological damage which time will most likely heal, if you go by historical evidence.

What are the chances on vaccines and therapeutics? According to Bill Gates, the drug "is unlikely to happen anytime soon. We'd need a miracle treatment that was at least 95 percent effective to stop the outbreak. Most of the drug candidates right now are nowhere near that powerful…. Realistically, if we're going to return to normal, we need to develop a safe, effective vaccine. We need to make billions of doses, we need to get them out to every part of the world, and we need all of this to happen as quickly as possible. That sounds daunting, because it is. It's going to require a global cooperative effort like the world has never seen."

Such an unprecedented global effort will be a function of how national and global institutions cooperate to get this done. One hopes science will override politics at the end of the day. What if science takes a long time? Historians say it takes one to two decades to find a safe and efficacious vaccine. Social distancing will stay till then in one form or another even if a treatment for all is found. What will be its impact on institutions?

The distribution of assets and income primarily determine the path of institutional change in the AR interpretation of history. There are large differences in the extent to which different occupations are able to comply with social distancing. The distribution of jobs immediately affected most disproportionately are in factories, farms, service and marketing chains. The spikes in jobs and income losses have affected disproportionately the lower-skill, lower-income occupations and business. These workers and entrepreneurs come from households who have low liquidity, low savings, no access to credit and no health insurance – a set of pre-existing conditions known as inequality.

The impulse response of social distancing is to deepen socioeconomic inequalities in mutually reinforcing ways. Calls for staying home and practicing social distancing ring hollow for millions in crowded, multi-generational households leading precarious hand-to-mouth lives in densely populated communities. Workers are exposed to different risks depending on their income and the severity of social distancing. A minority in lower-income percentiles have work or business in healthcare, pharmaceutical, food supply chains, deliveries, essential industries and services. They expose themselves to risk of infection as will those who return with the gradual reopening of various activities.

A vast number of workers and entrepreneurs have to choose between exposure to greater risk by not giving up their work or business or bearing an income shock. As they slide down below absolute poverty levels, they care less and less about keeping themselves immune from contracting the virus and more and more about survival risks. If you must choose between a 10 percent chance of dying if you go to work and 100 percent chance of starvation if you stay at home, you will choose work. The resulting change in behavior could take many different forms, but most will require dispensing social distancing.

Workers employed in high skilled occupations and entrepreneurs in large businesses are more able to self-isolate compared to their peers in other statuses. The risk adjusted benefit-cost ratio of social distancing exceed one by a large margin for them while a vast majority of others find themselves on the wrong side of this equation.

This pandemic may be blind to the circumstances of the individuals, but the shares of impacted people vary significantly across socio-economic groups. That poorer people are more exposed to natural disasters and communicable diseases needs no fresh evidence. Workers in informal employment, who tend to earn low wages, are not protected from the impacts of demand reductions and mandatory closures. Hoarding and disruption of logistics have caused food shortages and price spikes. Drawing down savings, working from home, income sources differentiation is not an option the poorer individuals can cling to for long.

The world was very unequally structured economically and politically to begin with, as documented by Branko Milanovic, a pioneer in the study of inequality globally. This is apparent everywhere from disproportionate elite power in all spheres of life. Consensus was emerging that globalization and the 4th industrial revolution exacerbated inequalities. Thomas Piketty observed that, compared to the poorest 50 percent, the richest 1 percent of individuals captured more than twice as much of the world's income growth between 1980 and 2016. The global upper middle class has seen its income stagnate with zero growth over two decades. The global middle class has risen rapidly as select developing countries began to converge toward rich countries. The global extreme poor have largely been left behind, with several countries stuck in a cycle of poverty and violence. Business as usual in the BC world was projected to worsen inequality by 2050 due to increased inequality within countries.

How will social distancing impact the pre-existing dynamic equilibrium path on the distribution front? A domestic economy can be tilted in a variety of directions: heavier or lighter industrialization, commercialization of agriculture, production for exports, high-technology production and so on. The threat of Covid-19 will tilt choices in favor of activities and technologies adaptable to social distancing, inducing countries to leapfrog AI technologies. On the other hand, the criticality of human interactions has been rediscovered. Balancing the two will inevitably require increased capital per worker (masks, gloves, sanitizers, immunity tests and higher order skills) to rebuild trust in workplaces and market exchanges. In general, those products and processes that create the greatest demand for high skilled labor have the most immediate and extensive impact on inequality.

This could reinforce the pre-existing set of property relations. Large wealth holders will be better able to adopt innovations necessitated by social distancing. They have already demonstrated their influence on the political process of designing and implementing policy responses to the corona impact in a way advantageous to their interests. AC economic adjustments working through existing economic and political institutions may intensify inequalities between classes. Lessons from Covid-19 may not be enough to unleash a set of institutional reforms that redistribute property rights and political powers. Trump getting a second term is more than just a possibility.

Thomas Friedman described globalization in several tiers in explaining why the world is flat. Globalization 1.0 went from size large to size medium. Globalization 2.0 introduced the multinational companies who went from size medium to size small. Then came Globalization 3.0 which went from being small to tiny. There's a difference between being able to make long distance phone calls cheaper on the Internet and walking around Dhaka with a Personal Digital Assistant with all of Google in your pocket. The enormity of this difference in degree made it a difference in kind.

Convergence of several technological and political forces produced a global, Web-enabled playing field that allowed multiple forms of collaboration without regard to geography, distance and even language. Covid-19 has created a hiccup that could create a large discontinuity between globalization 3.0 and globalization 4.0. Some of the great levelers which flattened the world may lose their potency as nations reassess the balance between localization and globalization to reduce dependence on global supply chains for facing public health emergencies, ensuring food security and protecting employment lifelines.

Global citizenship, notwithstanding its reinvention, may therefore continue the backslide ignited by the resurgence of ultra-nationalist forces in the decade just past. Developed countries are grappling with the challenges amid the internal preoccupations and idiosyncrasies of their leaders. The world is at a critical juncture in which global interconnectedness can be seen either as a strength to combat an invisible enemy of the mankind together or as a pathway for virus transmission. Rewiring of international trade, finance, migration and tourism in the presence of incomplete information, loss aversion, disinformation and free riding could make the world steeper if some nations choose to "wear masks" (read protect others) while others do not. This will reverse the declining trend in inequality between nations which in turn may exacerbate the rising inequality within nations.

The incontrovertible evidence on the implications of inequality needs no restatement. COVID-19 crisis has added drama and urgency to the need for corrective actions. It has drawn attention to inequality as a pre-existing public health condition that complicates fighting a highly transmissible virus. The most compelling writing on the wall is that extreme inequality cannot work for anybody in the AC era. Even the most privileged cannot build their walls, within or between territories, high enough to isolate themselves from epidemics.

This does not mean that the so called "fat cats" will not be delusional enough to try. Only time will tell whether the surviving old and the new players in the political and economic spaces will internalize this externality through collective action that delivers resilience through inclusive human capital systems, universal health insurance and responsive social protection. So far, there is hardly any evidence that the game will change after all.

I hope I am wrong!