Global inequality and the pandemic: exaggerated hopes and fears?

The pandemic has barely increased global income inequality—but it has made other inequalities worse.

The pandemic and the lockdowns and stimulus programmes governments have adopted to fight it and the associated economic crisis have affected different people, industries and countries to different degrees, in terms of the distribution of income and production.

Let’s start at the bottom: many people lost market income as their own or their employer’s business suffered from lockdown or collapsing demand. But, thanks to public-spending programmes, disposable income did not change that much, at least in rich countries but also in several poorer ones, for instance Brazil. Therefore in 2020, the few already available data and studies show, within-country inequality did not increase in many states.

In developing countries, however, the poor are often working in the informal economy where they are not benefiting from compensating policies, such as job-retention schemes. Increasing poverty under these circumstances might become statistically visible a year or two from now.

Some industries, notably (air) travel, accommodation, tourism and non-food retail, were affected more by lockdowns or consumers’ fears than others (communication and information-technology firms boomed). This sectoral bias led to differential national recessions. Economies which had been strongly reliant on tourism experienced deeper crises—in Europe, Mediterranean countries suffered most. But EU-wide inequality hardly changed, because poorer eastern member states performed relatively well.

Worldwide, the economies with the steepest decline of gross domestic product between 2019 and 2020 were Macao (-56.9 per cent) and the Maldives (-33.2 per cent) against a global average of -3.5 per cent, according to World Bank data. Rich countries able to provide massive fiscal and monetary stimuli had an advantage vis-à-vis poor and already highly indebted nations.

Global distribution

How do these developments add up to changes in the global distribution of income? In February, Angus Deaton published a provocative analysis positing, contrary to widespread belief, that global inequality had declined during the pandemic. The GDP of high-income countries declined more than that of poorer countries, mainly because death rates in 2020 were higher in richer countries. But if one weighted the countries by population the effect disappeared.

In 2021, many poorer countries, in particular India, have experienced new waves of Covid-19 infection, with a high number of deaths. International Monetary Fund forecasts for the year still show higher growth for emerging and developing than advanced economies (6.8 per cent against 5.1 per cent), probably due to the stellar performance of China. Their share of global GDP (at purchasing-power parities) increased from 56.5 per cent in 2018 to 57.8 per cent in 2021, while the advanced countries’ share declined from 43.5 per cent to 42.2 per cent. But soon, emerging economies might face more obstacles to catch-up growth, such as higher interest rates, declining demand for commodities from China, weaker growth of world trade and new waves of the coronavirus.

Calculating the international distribution of income is tricky. In his Worlds Apart: Measuring International and Global Inequality (2015), Branko Milanovic differentiated three metrics: by country, regardless of size; by country, weighted by population but still bracketing out domestic inequality; and by person, regardless of nationality, thus considering within- and between-country inequality. The third represents the most accurate approach but requires enormous data, unavailable on a global scale for recent years.

Extremely high

To approximate an adequate estimate of inequality defined by the second concept, the global quintile (S80/S20) ratio compares the income of the richest fifth of the world’s population with that of the poorest 20 per cent. This ratio is about five in Germany and also on average in EU member states. For the EU as a whole it is about eight, although six at purchasing-power parity (discounting variation in cost of a given basket of goods).

To calculate the global value, GDP and population figures from the World Development Indicators database of the World Bank allow countries covering 98 per cent of the global population to be ranked by per capita income. Including as many of the poorest and richest countries as necessary to get a fifth of the global population (approximately 1.5 billion) in each case, in 2020 the income of the poorest quintile amounted to about $1.7 trillion (of a total world GDP of about $80.8 trillion), while the richest fifth took in $55 trillion. This results in an extremely high S80/S20 ratio of 32.4.

Figure 1 shows the respective values for the last five years. Global inequality (measured this way) declined until 2019 but the pandemic reversed that trend, albeit in a minor way (not even returning to the level of 2018).

Figure 1: global income inequality (quintile ratio) 2016-20

It remains open how the more severe impact of the pandemic in 2021 on poorer, hardly-vaccinated countries will change that picture. Neither Deaton’s optimism nor the exaggerated fears of many well-intentioned observers seems however to be justified by the available data. Even the most famous critics of inequality, Thomas Piketty and his colleagues, estimate that global inequality declined between 1980 and 2020.

Assessment difficult

The indicator calculated here, though, represents global inequality according to Milanovic’s second concept. ‘True’ inequality (concept three) is certainly higher because with concept two the income of the rich in poor countries lifts their overall per capita income.

An estimate by Cem Keltek and myself ten years ago gave a value of 50 for the global quintile ratio, considering within-country as well as between-country inequality. On the Gini coefficient, which ranges from 0 for total equality to 1 for total inequality, Milanovic estimated the values for 2013 at about 0.5 for his first and second concepts and at 0.7 for his third. Both estimates indicate that true inequality—whose assessment is difficult and, due to weak data availability, only possible years later—is about 50 per cent higher than concept-two inequality.

When we calculate poverty in the same way—considering whole countries while neglecting their internal distribution of income—the results confirm the trend in Figure 1. If we use World Bank poverty definitions ($1.90 or $3.20 a day) we see a decline in incidence until 2019. The poverty reduction has been slow for the poorest (below $1.90) but significant for the group below $3.20 (falling from above 14 per cent of the world’s population in 2016 to 8.26 per cent in 2019). The same is true if we take 60 per cent of the global median income (about $4,300 in 2020) as the poverty threshold (that’s $2,580 or about $7 a day). The proportion falling below had declined from 43.7 per cent in 2016 to 40.7 per cent in 2019.

On all three measures, poverty increased in 2020, though by less than one percentage point. But this still implies that the pandemic crisis added tens of millions of people to the global poor.

Other dimensions

The focus here has been on income inequality and poverty. It is quite likely that the pandemic has worsened other dimensions of inequality and welfare, such as wealth and health inequality or gender and ethnic divides.

Wealth will have become more concentrated, due to the asset-price inflation triggered by the extremely loose monetary policies adopted by the most important central banks. In spite of the dramatic recession in the second quarter of 2020, stock markets recovered quickly and achieved new highs in 2021, while house prices increased dramatically.

As Oxfam reports, the wealth of the world’s richest ten billionaires increased by $540 billion between March and December 2020. In the medium to long run, these developments are likely to increase income inequality, through the incomes rich asset-owners derive as rents.

The pandemic has endangered progress on gender equality, too. During lockdowns, traditional role models reasserted themselves. Women have been more likely to take care of children and the household than men during the closure of nurseries and schools. They were also less likely to continue working from home, as a larger share of their jobs (in the care economy, education and health) involved more direct contact with people.

Last but not least, the pandemic affected the health of people differently. The poor have been more likely to be infected and to die from Covid-19, due to existing health issues, worse living conditions and work that could not be done from home, even in high-income countries. Poor countries have weaker health systems and higher mortality, which often will not be traced to the pandemic by the authorities although high excess mortality rates clearly indicate it. And the global population has been vaccinated to an extremely unequal degree, with very low rates of vaccination in most poor countries.

Given these weaknesses and the limited systems of social protection in the poorer nations of the world, it is likely that the pandemic will increase within-country inequality and poverty in low- and middle-income countries.