Income inequality is among the most hotly debated economic topics of our times. It’s also one of the most misrepresented. For years the left has condemned the widening disparities that followed the financial crisis. And yet, a recent paper showed the global income gap actually declined between 2008 and 2013.
The next myth to be busted concerns the SARS-CoV-2 pandemic. A number of scholars and international organizations, including economics Nobel prizewinner Joseph Stiglitz and the United Nations, worry that the world has become a less equal place because of Covid-19 and the ensuing economic crisis. They think richer countries have been better able to protect themselves.
This is wrong. A new study by Princeton University’s Angus Deaton, another Nobel prizewinning economist, shows that — in 2020 at least — the opposite happened on a global level. As the pandemic hit high-income economies disproportionately, the gap between poor and rich countries narrowed. This doesn’t speak to the sizeable inequalities within individual wealthier countries, but it at least shows us that the recent catching up of developing nations has continued.
Unfortunately this isn’t exactly a cause for celebration at the end of a grueling year of Covid. It tells us more about the abysmal failure of many Western governments to protect their citizens than it does the successes of poorer nations. The pandemic has exposed tragic gaps in the public-health systems of wealthy countries.
Remarkably, Deaton finds that states with a higher per capita income also suffered the heaviest death toll from the pandemic on average. This result may be skewed by underreporting in poorer nations, and the younger populations in Asia and Africa. It could also be reversed as the pandemic continues to rage on and richer countries secure better access to vaccines. But the extraordinary number of Covid fatalities in some of the world’s wealthiest places — such as the US, the UK and Sweden — is still striking.
The paper also shows that nations that took a looser approach to lockdowns in the hope of protecting their economies didn’t benefit much. The countries with the most deaths were also, on average, those with the biggest predicted drop in gross domestic product, as measured by International Monetary Fund forecasts. “It is not a matter of your money or your life, but your money and your life,” writes Deaton.
The reduction in worldwide disparities follows a trend that started in 2007, but it appeared more marked in 2020 than was forecast before the pandemic. If we weighed different countries according to their number of inhabitants, we would see a slight increase in inequality. But that is driven entirely by China, which has weathered the pandemic much better than many other states. Once Deaton excludes China, the downward trend reappears.
This paper doesn’t mean that the world has become more equal at an individual country level. In the US, there is evidence that the pandemic recession has destroyed lower-earning jobs much faster than higher-earning ones. Sweden is worried that loose monetary policy is widening the income gap and creating lots of new Swedish millionaires.
There are also significant sectoral differences in how these in-country divisions are widening — people who work in tourism have fared much worse than logistics staff, for example — but it has overall been much easier for clerical workers to adapt to a socially distanced society and protect their wages.
It’s also important to look at individual nations when considering the improvement in the developing world. Even if income in these countries fell less sharply than in richer nations, it would probably be more painful since a larger proportion of the population is close to the poverty line. The World Bank expects the pandemic to push between 88 million and 115 million more people into extreme poverty in 2020. And it’s far too early to have a full picture of the long-term economic damage from the pandemic, especially on the opportunities of poorer children who’ve had to cope with school closures.
However, Deaton’s results remind us of the need to take a closer look at the numbers before making assumptions over the economic impact of the pandemic. Just like Covid-19 and the human body, this recession has hit the world economy in baffling ways.
Bloomberg
