Inequality is safe haven for the virus

There are large differences in the ways in which this pandemic has affected people in different walks of life.  The health and economic consequences of the virus are not neutral between income and social classes. Those from low income households face a higher risk of developing a severe case if infected with the virus and they cannot escape the livelihood disruptive domino effect as much as the higher income households can.

A London Imperial College paper (May 2020) apprehends social inequalities will determine how the new coronavirus affects vulnerable populations in low- and lower middle-income countries. The fact that the world's richest nation – the United States comprising less than 5 percent of the global population – accounts for one quarter of both infections and deaths is no evidence against vulnerability differentials by wealth classes.

Ominous so far

It is too early to expect generalizable evidence on the transmission of the virus beyond health.  Notwithstanding many research innovations, the evidence to date constitute snapshots and simulations of knowledge in the making. Available evidence on the economic impact are like PCR tests: negative results do not mean immunity.  All it means is you were not infected at the time your swab was taken. Same goes for the economy. Evidence on what has happened so far has very little predictive power. However, they are helpful in gauging the validity of perceptions on the distribution of the social and economic impact across different stratums of the population all over the world. 

The effects are wide ranging. A recent survey by the Bangladesh Institute of Development Studies found about 13 percent people have become unemployed due to the pandemic, with higher percentages of income lost at lower levels of income.  Revenues of entrepreneurs operating small and medium enterprises dropped by 67 percent.  The number of people in poverty increased by 16.4 million.  A study by the South Asia Network in Economic Modelling estimates 53 percent of the employed youth in Bangladesh is at risk of falling below poverty. In an earlier Brac survey, 72 percent reported job losses or reduced work opportunities while 8 percent employed were not paid.  Job postings declined from about 4000 before corona to 1000 after, according to Bdjobs.  The Tenants Association reports 50,000 households have vacated apartments in Dhaka city after corona.

The asymmetric distribution effects are common across countries.  M Niaz Asadullah and Rutiya Bhulla of Global Labor Organization find thousands of tuk tuk drivers and street vendors are the hardest hit in Thailand, affecting disproportionately the bottom 50 percent of workforce. Thailand's wide digital divide has turned into a vector transmitting inequalities. The International Labor Organization claimed in April that about 400 million workers from India's informal sector are likely to be pushed deeper into poverty. Other studies (Saini and Khatri, April 2020) on India conclude inequality is worsening.

Unskilled workers and small businesses are among the worst hit. The economic contraction affects both labor and capital, but the replaceable poorer workers are facing a sudden collapse in livelihoods. Capital-intensive production, such as manufacturing can manage containment measures more easily than labor-intensive service sectors who have to cater people directly. Cottage, micro and small enterprises are most vulnerable because they do not have the cash reserves to cope with economic uncertainty and typically have limited options to access financing.

Flat no more?

There is hardly any doubt now that the pandemic will have long-lasting economic and social consequences globally. These will stem from the direct and indirect effects of illness, people's preventive behaviors and government policies. The world is no longer as level a playing field, as depicted in Thomas Friedman's bestseller "The World is Flat".  Inequality between and within countries had been high to begin with and not so straightforward to discern.

The Elephant Curve created by Christoph Lakner and Branko Milanovic in 2013 is a good point of departure on global economic inequality. Their chart has three distinct parts: a hump comprising the world's poorest, mostly from developing countries; a valley containing the working and middle class of the developed world, but also the upper class of poorer countries; and a "trunk" made up of the global elite. The hump and subsequent valley represent the enormous growth emerging countries saw relative to the middle and working classes in developed countries. Growth accrued more to the richest 1 percent than any other income level resulting in the elongated trunk.

There is a growing literature on the likely global consequences of COVID-19 drawing on the experience following past major epidemics. Davide Furceri, Prakash Loungani, Jonathan D. Ostry, and Pietro Pizzuto (IMF, May 2020) find that the effects this time may be similar to those of other types of crises in exacerbating inequality, including by depressing employment prospects for most vulnerable, such as low-skilled workers everywhere.

The global elite (top 1 percent) are best placed to contain income losses because of stronger initial ability to adapt to the virus such as earning from home. Their high-income growth in the past and a high initial share implies they will continue to capture a large share of global income. Their asset portfolios may be better positioned to benefit from rise in market values of companies prospering from the virus such as Amazon, Facebook, Google and Zoom.

The income of global upper middle class stagnated in recent decades. They can also cushion losses due to adaptability as good as the top elite but are not exactly immune from financial distress if the recession lasts long. The jury is still out on how much income loss the elites and the upper middle class have suffered in the current recession.

They have cut expenditures the most in the US. A research team led by Raj Chetty of the Harvard University finds that the top quartile accounts for more than half of the aggregate spending reduction between January to June. The decline in spending were driven by health concerns rather than a reduction in their purchasing power or expected income, as indicated by just 19.5 percent share of consumer durables in the total consumption decline, unlike in past recessions. Expenditures on in-person services (restaurants, barbers) accounted for 67 percent of the decline. The decline in job postings for high education workers have been smaller.

The global middle class may experience a sudden stop to the rapid income growth as consumer spending on exports, tourism, and internationally mobile labor services take a hit. Tens of thousands of people with jobs not deemed essential are suddenly without work and cannot pay their bills. The rate of decline in small business revenues are concentrated at low to middle end of the income distribution.

The global extreme poor who were largely left behind may suffer the most, thus pulling the elephant's slumped tail further down. Concentrated at low end of the income distribution, employment losses are higher for low skill, low education workers. For low-wage workers, a few unpaid days away from a job threatens their entitlement to food for as long as a month.

The elephant may be thinning in all its parts in ways that leaves it unrecognizable. Depending on their socio-economic status, workers are exposed to different risks. Workers in healthcare, critical supply chains (food, pharmaceuticals, e-commerce, and services), industrial, retail and transport, with no option to self-isolate, have to choose between exposure to greater risk by not giving up their wage, or receiving an income shock that, most studies so far demonstrate, are on average greater than experienced by the higher deciles. Workers on temporary and implicit contracts, and the self-employed have the least protection.

The sinking elephant may in fact be drowning. The emerging picture shows a grave deterioration of socio-economic development reflected in the projections of the Human Development Index for 2020, unlike in crises over the past 30 years, with the virus's triple hit to health, education, and income. "The combined impact of these shocks could signify the largest reversal on human development on record", according to UNDP, and certainly more so for the poor.

Inequality fosters the virus

Containing the virus quickly requires decisive collective action. Extreme inequality undermines such action through multi-level social dysfunction. Effective implementation of testing, contact tracing, and treating has to go hand in hand with social distancing, masking and hygiene in the community you share life with. The needed socio-behavioral adaptations to the virus cannot be universally prompted without social mending.

The opportunity to stimulate consumer and business spending is limited by health concerns. Addressing the virus itself through inclusive public health efforts is a sine-qua-non. This is necessary, but not sufficient.  Sufficiency requires using economic policies to limit hardships among low income workers and entrepreneurs through fiscal transfers, tax cuts, wage subsidies, liquidity and credit guarantees. The ability of the poor to cooperate in fighting the virus also hinges critically on access to clean water, electricity, telephone service and roads.

"In this together" is not just a cliché

The absence of governments with capacity to deliver policies favoring the poor is ubiquitous. Harvard professor Dani Rodrik recently remarked "there is nothing like a pandemic to highlight markets' inadequacy in the face of collective-action problems and the importance of state capacity to respond to crises and protect people."

The obstacles are elite capture of states and administrative failures. Existing elites have the market and political power to appropriate the benefits and insure themselves aginst losses from virus induced structural changes on the demand and supply sides. Large wealth holders are better able to control innovations and influence the design of policy packages in ways advantageous to their interests.

Seeking to design inclusive policies in the midst of a pandemic is in the enlightened self-interest of the elites. Even the most privileged cannot isolate themselves from the pandemic on this planet.  Anthony Faucci and Bill Gates, among others, have envisaged time and again, COVID-19 highlights global interconnectedness. It requires not compassion but a scientifically informed understanding of the mutuality of self-interest locally and globally.