Increase in inequality: legacy of Covid-19

If the world economy evolves as expected, 2022 will be a year of recovery and repair. Inflation fears will subside, asset prices will remain firm, and central banks and fiscal authorities will gradually withdraw emergency support.

With any luck, we will see 2022 as the year the Covid-19 virus was brought under control and the economy recovered from the pandemic.

This optimistic scenario, however, overlooks what will turn out to be a painful and lasting legacy of the pandemic: an increase in inequality. According to a recent IMF study, based on epidemics in this century, epidemics increase income inequality and these effects last for many years after the start of the epidemic. We know that the covid virus is the “fat” of pandemics that resulted in the greatest economic dislocation since the Great Depression. If the results of the IMF study are any guide, the current pandemic will have a prolonged, adverse and severe impact on inequality.

Unlike macroeconomic data, which are timely, a reliable picture of inequality will take time to emerge given the lag in observations and publication of data on income distribution. Even setting aside data problems, drawing strong conclusions about inequality is complicated for two more reasons. First, we must be clear about the type of inequality. Are we talking about wealth or income inequality or health or maybe carbon footprint inequality? Are we comparing inequality at the individual level, at the household level, or at the country level? Are we examining the wealth of the private sector in relation to the wealth of the state?

Then there is the question of the specific measure that can be implemented to measure inequality. Is it the well-known Gini coefficient or the Theil index? The answer will then depend on the part of the distribution that is being measured.

Let’s start with the data we already have. According to the latest World Inequality Report, the fall in income was uniform, and therefore inequality did not increase, between rich countries and low-income countries. But, what really matters for an individual is the distribution of wealth and income within a country. Early indicators already point to an alarming rise in inequality within countries with the poor getting poorer and the rich getting richer. For example, some 100 million people fell into extreme poverty in the last two years according to a World Bank analysis, adding to the 650 million in 2019.

What is particularly surprising is the evolution at about the same time on the other end of the spectrum. This Report calculates that the wealth of the world’s billionaires grew by a staggering 50% between 2019 and 2021, when average global wealth increased by just 1%. Another key factor is the intervention of governments in high-income countries to support low-income households, which, while avoiding a greater impact on vulnerable groups, has had an enormous cost for public finances, that is, governments they are poorer relative to the private sector.

The enduring legacy of the pandemic will include the scars of job losses, depleted savings, mortality, morbidity, and disruptions to children’s education. The consequences of the pandemic will remain with us for a long time, public policies focused on reducing inequality must be a priority.

Lucia Buenrostro

Actuarial by UNAM

guest column

Lucía Buenrostro holds a Master’s in Economics from El Colegio de México and a Master’s in Mathematics and Finance from Imperial College (United Kingdom). She has a PhD in Economics from the University of Warwick (United Kingdom). He has carried out teaching and research work at UNAM, the University of Warwick and the University of Oxford.

He has extensive and solid experience in the international financial system where he worked for almost 15 years in London as head of risk management areas in investment banking.

Leave a Comment