Pandemic Lockdowns may exacerbate Inequality

Take Aways:

1. As we enter summer, politicians face a very very serious dilemma.

2. The economic downturn is disproportionately affecting lower income groups

3. Income inequality may rise within certain nations

4. Aside from worsening poverty, other potentially negative outcomes include, spikes in mental illness, suicides, domestic violence, crime, and malnutrition

5. Economic inequality may rise between advanced economies and emerging markets

Social Inequality within Nations

More companies are asking employees to do their jobs from home. Cities and states are ordering nonessential businesses to close. Microsoft, Google, and Zoom have made versions of their work from home software free. Telecommuting is becoming the new normal for many office workers.

These mandatory closures may permanently change our work patterns. Employers may find employees do not want (or need) to return to the office once closures end. But that arrangement is only realistic for white-collar workers. Management, professional, and administrative careers overwhelmingly can take their work out-of-office. For most occupations, remote is not an option.

Arts and entertainment, accommodation, and food service workers are all but barred from remote work. A stagehand cannot move scenery from their home office. A bartender cannot pour a drink over the phone. A hotel porter cannot move bags via video conference. These are some of society’s most at-risk workers. The average hourly wage for leisure and hospitality workers is less than $15/hour, per the Bureau of Labor Statistics (BLS). Now, with mandatory closures, these wage earners find themselves without jobs.

In 2018, only 29% of workers could even consider working from home, BLS data shows. While over 47% of those with at least a bachelor’s degree worked at home sometimes, only 9% of workers with a high school diploma as their highest education level did.

Remote work arguably widens economic inequality. As the pandemic forces these changes, employees that can work remotely will do so.

Although the bipartisan Families First Coronavirus Response Act (HR 6201) in the US would provide relief for some industries, the provisions for emergency paid leave won’t apply to many blue collar workers.

Taking a global perspective however, as of the end of March 2020, the OECD estimates that 1.7 billion people have been asked to remain at home by their governments, whether through a full lock-down or similar measures. As people are required to self-isolate and minimise social contact, using the internet and online platforms has become the safest way to access necessary goods and services. It is therefore not surprising that “gig workers” – workers that digital platforms hire on a per-service (“gig”) basis – have been identified as “key workers” in the fight against Covid-19, be it delivering household necessities or performing services, such as stocking shelves in supermarkets or caring for the elderly or disabled.

Gig workers have been identified as the highest risk group as they cannot always maintain safe social distancefrom their customers. Gig workers often live hand to mouth, and they just cannot afford to take time off. Moreover, some workers have leases and other upfront payments that they have committed to make to the platforms they work for, and they are simply unable to hold off work until they raise what they owe. It is worth noting that the gig economy also relies on workers in developing countries where overall most workers are informal and very often lack certain social safety nets.

Staying at home is a luxury for many. Michael Burry, the doctor-turned-investor who famously bet against mortgage securities before the 2008 financial crisis, became very active on Twitter in 2020.  His message was that lockdowns intended to contain the coronavirus pandemic are worse than the disease itself.  Burry says that Government-directed shutdowns in the U.S., which led to millions of job losses and may trigger one of the country’s deepest-ever economic contractions, aren’t necessary to contain the epidemic and have disproportionately hurt low-income families and minorities.

Burry earned his M.D. at the Vanderbilt University School of Medicine, but decided to become a professional investor after making hugely profitable bets in the stock market. He shot to fame after his hedge fund’s bearish mortgage wagers were chronicled in “The Big Short,” an Oscar-winning movie based on the best-selling book by Michael Lewis.

“Universal stay-at-home is the most devastating economic force in modern history,” Burry wrote in an email to Bloomberg News. “And it is man-made. It very suddenly reverses the gains of underprivileged groups, kills and creates drug addicts, beats and terrorizes women and children in violent now-jobless households, and more. It bleeds deep anguish and suicide.”

Consider Singapore which many would agree is a relatively developed, service based economy. By the first week in April 2020, social distancing policies meant that 239 companies had gone into liquidation since during the Q1 2020, compared with 287 for all of 2019. Another 19,000 companies had ceased operations since January – that is more than 200 companies a day, on average. Many of them faced liquidation. Eighty percent of restaurants planned to lay off staff.

Companies with cash on their balance sheets and private-equity firms, which have mountains of committed investor cash, may start acquiring weaker ones. Around the world, small and medium-sized firms are particularly exposed. In America, a survey published on April 3rd by MetLife, an insurer, and the us Chamber of Commerce found that 54% of non-sole-proprietor firms with fewer than 500 employees were either closed or expected to close in coming weeks.

So in a way, the pandemic has and will disproportionately impact companies with “preexisting conditions”.  A high profile case may be Boeing or Air Asia.  Boeing’s aircraft was involved in high profile crashes in 2019 while Air Asia was having issues making lease payments in early 2020 before the extent of the pandemic was widely known.  So for many companies, especially SMEs with limited scope for Government bailouts, would see the pandemic as the straw that broke the camel’s back.

Socially, the longer the lockdown lasts, history shows, the worse such outcomes will be. A surge of unemployment in 1982 cut the life spans of Americans by a collective two to three million years, researchers found. During the last recession, from 2007-2009, the bleak job market helped spike suicide rates in the United States and Europe, claiming the lives of 10,000 more people than prior to the downturn. This time, such effects could be even deeper in the weeks, months and years ahead if, as many business and political leaders are warning, the economy crashes and unemployment skyrockets to historic levels.

Already, there are reports that isolation measures are triggering more domestic violence in some areas. Prolonged school closings are preventing special needs children from receiving treatment and could presage a rise in dropouts and delinquency. Public health centers will lose funding, causing a decline in their services and the health of their communities. A surge in unemployment to 20% – a forecast now common in Western economies – could cause an additional 20,000 suicides in Europe and the United States among those out of work or entering a near-empty job market.

None of this is to downplay the chilling death toll COVID-19 threatens, or to suggest governments shouldn’t aggressively respond to the crisis.

The medical battle against COVID-19 is developing so rapidly that no one knows how it will play out or what the final casualty count will be. But researchers say history shows that responses to a deep and long economic shock, coupled with social distancing, will trigger health impacts of their own, over the short, mid and long term.

Inequality Between and Among Nations

Joerg Wuttke, president of the EU Chamber of Commerce in China, says that if there is one lesson people are drawing from the pandemic in this regard it is that “single source is out and diversification is in.” In other words, companies do not just need suppliers outside China. They need to build out their choice of suppliers, even if doing so raises costs and reduces efficiency. Many expect to see new demand for production in Vietnam, Myanmar and elsewhere.

For some, the need to have more suppliers looks like an opportunity to promote possibilities at home. The government-owned Development Bank of Japan plans to subsidise relocation costs of companies that bring production facilities back to the country. Rich Lesser, the CEO of Boston Consulting Group (BCG), which advises big global firms, says that robotics and other new approaches to manufacturing make the case for moving factories closer to home more compelling, because they reduce the cost difference. Just as previous information technology was put to work underpinning the spread of supply chains, so today’s can be used to shorten them—potentially making companies more responsive to local tastes.

What about inequality among countries? If wealthier economies struggle, poorer countries simply lack the capacity to cope with economic shocks of this magnitude. It would be therefore reasonable to expect that the divide between wealthy and poorer countries will continue to grow.

To explore this we return to Thomas Piketty.

As we progress in the twenty-first century, research is being done to better understand the relative and paradoxical pauperization of the poorest nation states.  Particularly in sub-Saharan Africa and South and Southeast Asia.

There has in general been a good deal of variation in the rate at which poor countries have closed the gap with rich countries since the 1970s. The China-India comparison is discussed at length in various studies.  China not only grew faster than India but also generated less inequality, probably because it invested more in education, health, and necessary developmental infrastructure.

More generally, we have seen that economic development has historically always been closely associated with state building. The constitution of a legitimate government capable of mobilizing and allocating major resources while retaining the confidence of the majority is the fundamental prerequisite of successful development and the hardest to achieve.

In this connection, it is striking to discover that the poorest states in the world became poorer in the period 1970–2000; things improved very slightly between 2000 and 2020 but did not return to their initial level (which was already very low). More precisely, if we divide the countries of the world into three groups and look at the average tax revenues of the poorest group (which consists mainly of African and South Asian countries), we find that tax receipts fell from nearly 16 percent of GDP in 1970–1979 to less than 14 percent in 1990–1999 and then rose to 14.5 percent in 2010–2018.

Not only are these extremely low levels; they also conceal important disparities. In many African countries, such as Nigeria, Chad, and the Central African Republic, tax revenues are just 6–8 percent of GDP. This level of tax revenue is just enough to maintain order and basic infrastructure but not enough to finance significant investments in education and health care.

At the same time, we find that tax revenues in the richest countries (essentially in Europe and North America plus Japan) have continued to increase, rising from an average of about 30 percent of GDP in the 1970s to 40 percent in the 2010s.

ASEAN as an Example

Let’s pivot to ASEAN.  In recent years, ASEAN countries have become much more trade dependent on China.  The volume of ASEAN-China trade stood at 345 billion dollars in 2015, the second largest after the 543 billion-dollar volume of intra-ASEAN trade. After China came ASEAN’s trade with Japan, the European Union and the United States, with trade volumes of more than 200 billion dollars. China has been ASEAN’s largest trading partner since 2009.

From 2005 to 2015, China’s trade with ASEAN grew by the largest margin – 13.2% – among its trade partners. South Korea-ASEAN trade grew by 10.9% over the same period, but ASEAN’s trade with the EU, Japan and the US grew only by 5.4%, 5% and 3.6% respectively.

Pre-pandemic, China’s was expanding at its slowest pace since the early 1990s.  In August 2019, China saw industrial output grow at its slowest pace since 2002.  Weeks later China’s Premier Li Keqiang said it would not be easy for the country to sustain growth rates of above 6%.  Domestic issues, the US-led trade war, and swine fever were already putting a brake on China’s rapid expansion.  Now we have the 2020 pandemic.

One would expect that a continued slowdown in China would adversely impact ASEAN.  Sectors such as tourism, real estate and commodities would be severely impacted thus increasing the gap  between wealthier and poorer nations.

Recent forecasts from the World Bank, the Asian Development Bank (ADB), and the IMF all see sharp declines in regional growth as a result of the economic shock of this pandemic, but they offer a range of projected growth.  The ADB’s Asian Development Outlook, which was released earlier in April 2020, forecasts that Southeast Asia will track closely with China and decelerate growth to +1 percent in 2020. The World Bank report, released in the beginning of April, includes both a baseline and a more pessimistic scenario, with the “lower-case” forecast projecting contractions of the major developing ASEAN countries in the -0.5 percent to -5.0 percent range, with the exception of Vietnam, which maintains positive (+1.5 percent) growth.

Although they measure a slightly different group of countries, the worsening of economic conditions and the ongoing spread of the crisis has lowered forecasts by these international financial institutions (IFIs) over the course of just a few weeks. Many private forecasts paint an even bleaker picture for ASEAN growth, projecting growth in the range of -1.5 percent for 2020.

Despite the increasingly pessimistic forecasts for the region, both the IMF and ADB project a strong rebound in 2021.The IMF projects growth for the ASEAN-5 to bounce back to +7.8 percent in 2021, while the ADB sees growth for Southeast Asia rebounding to +4.7 percent next year.  In short, they see the global economic crisis brought on by the Covid-19 pandemic as a huge but relatively short-term shock. Only the “lower-case” scenario of the World Bank foresees a slower recovery, with the major ASEAN economies still in negative growth territory in 2021, again with the exception of Vietnam.

Country-specific impacts will depend on the structure of each economy and their initial economic conditions heading into the crisis. Hardest hit will be Thailand, which was already struggling in 2019 and early 2020 with a severe drought, budget delays, and a strong currency and was somewhat slow to respond to the onset of the pandemic.

The closely entwined economies of Malaysia and Singapore are forecast by the ADB to see close to 0 percent economic growth this year, with only Malaysia expected to rebound strongly next year. However, the IMF projects recessions for both economies in 2020, with Singapore projected at -3.5 percent growth and Malaysia at -1.7 percent. Singapore’s own projections by its Ministry of International Trade and Industry have been revised down to between -0.5 percent and -4 percent growth this year, with the lower end more likely.

Indonesia and the Philippines are forecast to see sharp deceleration of growth, with the IMF projecting growth in the barely positive range. Vietnam stands out in all these forecasts as the only ASEAN economy to maintain moderate growth in 2020, in the range of +2.7 percent (IMF) to +4.8 percent (ADB), and is expected to strongly rebound in 2021 (+6.8 percent to +7.0 percent growth).

The impact of the Covid-19 crisis is hitting these economies through several channels.

First, ASEAN countries are highly open to trade and investment as well as tourism, all of which have been severely disrupted by the spreading global pandemic. Demand for these countries’ exports—whether palm oil and metals from Indonesia; manufactured components from Malaysia, Vietnam, and the Philippines; or textiles from Cambodia—have fallen sharply and will continue to stagnate throughout the crisis.

The suspension and likely very slow resumption of tourism will hit the Thai economy especially hard, which depends on tourism and travel spending for one-fifth of its GDP, and will also impact the tourism-dependent economies of Malaysia, Indonesia, Philippines, and Vietnam. Singapore had already been hit by declining trade volumes in the midst of U.S.-China trade conflict in 2019 and is now facing a further drop in trade in goods as well as declining services trade and tourism.

ASEAN economies have a diversified set of trade and investment partners, including the United States, European Union, China, and intra-ASEAN trade. In normal times, this diversified portfolio of partners would provide a buffer for a regional economic downturn, but in this global pandemic all of these partners are facing a halt to or dimming prospects for growth.

Second, the collapse in oil prices caused by the sudden drop in energy consumption due to the widespread lockdowns and travel bans will have a sharp impact on economies dependent on exports of fuel, namely Indonesia, where coal and oil comprise nearly one-quarter of exports; Malaysia, where oil and gas make up about 16 percent of exports; and of course Brunei, whose economy is almost entirely supported by exports of crude and natural gas (over 90 percent of exports).

Third, the sharp drop in domestic demand due to lockdowns and other public health measures will have large multiplier effects on these economies, since consumption represents about 60 percent of GDP in the major ASEAN economies, with Singapore being an exception.

The fourth channel of economic impact from the global Covid-19 crisis is capital outflows. Whereas foreign direct investment is generally sticky, international portfolio investors in emerging market equities and bonds have driven large capital outflows as they seek safe havens in the face of the deepening global pandemic. According to the Institute of International Finance, capital outflows from emerging markets have totaled nearly $100 billion so far this year, with Southeast Asian economies taking a sizeable hit. Indonesia has seen an outflow of $8.2 billion in capital by the end of March. These outflows have led to regional currency depreciations, especially the Indonesian rupiah, which has depreciated 14.5 percent year to date, while the Thai baht, Malaysian ringgit, and Singapore dollar all depreciated by more than 4 percent in the March 2-19 period. Central banks in the region have also intervened to support their currencies, but tightening financial conditions complicate their efforts to maintain accommodative monetary policy and shore up their economies in the face of the Covid-19 crisis.

Over the longer term, it is difficult to predict the ultimate economic impact on Southeast Asia because there is vast uncertainty about how the pandemic will play out.  It is likely to intensify the ongoing process of reshoring capacity away from China and the rest of East Asia. Although certain sectors in some Southeast Asian economies have benefited from recent supply chain shifts out of China, it is less clear that post-pandemic trends will be as favorable. National security considerations in the United States and other advanced economies now loom large over questions about pharmaceutical ingredients and inputs for and production of medical supplies, while travel disruptions and difficulties in the form of quarantines, health certificates, and fear of travel will likely further accelerate the shortening of supply chains.

The shift of economic activity to the cloud and the need for mobile tracking and other tech solutions to contain and respond to future outbreaks of the virus could benefit Southeast Asia, in particular countries like Singapore, Indonesia, and Vietnam, which are already on the leading edge of the mobile-app-based digital economy. A global or regional shift in demand toward digital applications, and government policies designed to support this sector, could spur innovation and boost entrepreneurs working on the digital economy, which would brighten the growth and development prospects for Southeast Asian economies once we get to the other side of this global crisis.

But is Inequality a Bad Thing?

Observers often say that worsening inequality stands as the source of social instability, the shift to the right and a backlash against (so called) globalization.

On the other hand, one can argue that inequality has actually stimulated innovation and growth for the benefit of all, especially in China, where the poverty rate has decreased dramatically.  But to what extent is this argument correct?  To fully answer this question one cannot simply say that there was too little inequality prior to 1980.

A similar argument could be made about India, Europe, and the United States—namely, that equality had gone too far in the period 1950–1980 and had to be curtailed for the sake of the poor.  Here, however, the problems are even greater than in the case of Russia or China.  Growth rates in both Europe and the United States were higher, for example, in the egalitarian period (1950–1980) than in the subsequent phase of rising inequality. This casts doubt on the argument that greater inequality is always socially useful. After 1980, inequality increased more in the United States than in Europe, but this did not lead to a higher rate of growth, much less benefit the bottom 50 percent of the income distribution, whose standard of living stagnated in absolute terms and fell sharply compared to

that of top earners.

In other words, overall growth of national income decreased in the United States, as did the share of the bottom half. In India, inequality increased much more sharply after 1980 than in China, but India’s growth rate was lower so that the bottom 50 percent was doubly penalized by both a lower growth rate and a decreased share of national income.

Therefore the argument that the income gap between high and low earners had been compressed too much in the period 1950–1980, thus calling for a corrective, has its shortcomings.

Nevertheless, it should be taken seriously.

For some observers the most striking fact is that the remarkable growth of certain less developed countries has so dramatically reduced global poverty and inequality while others deplore the sharp increase of inequality at the top due to the excesses of global hypercapitalism. Both sides have a point: inequality between the bottom and middle of the global income distribution has decreased, while inequality between the middle and top has increased. Both aspects of the globalization story are real.

The world’s largest fortunes have grown since 1980 at even faster rates than the world’s top incomes.

The gap between top fortunes and the rest continued to grow even in the decade after the financial crisis of 2008 at virtually the same rate as in the two previous decades, which suggests that we may not yet have seen the end of a massive change in the structure of the world’s wealth.

Every human society must justify its inequalities: unless reasons for them are found, the whole political and social edifice stands in danger of collapse.

In today’s societies, these narratives comprise themes of property, entrepreneurship, and meritocracy.  Social Darwinism means that wealth flows to the most enterprising, deserving, and useful.

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