Covid-19 pandemic has fed on existing inequality to generate more inequality

Updated on Jul 29, 2021 05:15 PM IST

Thanks to the coronavirus disease, countries outside the advanced world will now grow at a lower-than-expected pace. Whichever way one looks at it, the poor have suffered disproportionately in the pandemic

A migrant worker carries his son as they walk along a road with others to return to their village, during the first nationwide lockdown to limit the spreading of coronavirus disease (Covid-19), in March last year, New Delhi. (REUTERS File) PREMIUM
A migrant worker carries his son as they walk along a road with others to return to their village, during the first nationwide lockdown to limit the spreading of coronavirus disease (Covid-19), in March last year, New Delhi. (REUTERS File)

In its latest update to the World Economic Outlook (WEO) database, the International Monetary Fund has kept its global growth forecast for 2021 unchanged at 6%. However, there is a catch. Advanced countries will now grow at 5.6% instead of the 5.1% projection of April 2021. As is obvious, this means that the countries outside the advanced world will now grow at a lower-than-expected pace. This is yet another evidence of the pandemic’s disproportionate burden on the poor. In fact, it can now be argued that the Covid-19 pandemic has fed off existing inequalities in the world to generate more inequality.

Advanced countries have further closed their growth gap with the rest of the world

Between 2001 and 2010, advanced countries saw an average economic growth of 1.7%. This number was 6.2% for developing economies and emerging markets. The latter kept losing their growth advantage vis-à-vis the advanced world and the difference between GDP growth for these two groups came down to just 2 percentage points in 2015. This is a reflection of the hangover of the 2008 crisis on the world outside advanced economies, part of which was a result of slowdown in export demand from the developed world.

Also Read | Cognitive bias explains the inconsistent citizen response to Covid-19

While these numbers did not improve significantly thereafter, at least there was no deterioration. Then came the Covid-19 pandemic. Advanced economies suffered a bigger contraction (4.6%) than those of developing countries and emerging markets (2.1%) in 2020. However, the former have seen a relatively stronger recovery. As a result, the GDP growth gap between these two groups is now much narrower levels than it was before the pandemic. The latest WEO projections suggest that GDP growth in developing countries and emerging markets will exceed that of advanced countries by just 0.7 and 0.8 percentage points in 2021 and 2022. Advanced economies have significantly higher per capita incomes than their developing economy and emerging markets counterparts. The fact that the latter will witness a relatively slower economic growth means that inter-country inequalities have increased after the pandemic.

A bigger, but also cheaper, fiscal stimulus is what drove the growth recovery in advanced economies

The stronger growth rebound in advanced economies is a direct function of fiscal support by governments. Fiscal deficit numbers are a testimony to this. Fiscal deficit as a percentage of GDP was 2.5% in 2018 and 3% in 2019 in advanced economies. These numbers were 3.8% and 4.7% in emerging market economies and 3.4% and 3.8% in low-income developing economies. The situation changed completely when the pandemic hit. In 2020, advanced economies ran the biggest fiscal deficit at 10.9% of GDP, a more than three-fold increase compared to the 2019 level. Emerging market economies and low-income developing economies increased their fiscal support by a much smaller margin: their deficit rose to 9.7% for the former and 5.5% for the latter group in 2020. Advanced countries are likely to enjoy a higher fiscal support in 2021 as well.

One of the reasons advanced countries could run higher fiscal deficits, financed from borrowing, is that they have lower borrowing costs than their emerging market and low-income peers. For example, the interest rate on 10-year US government bonds is less than 2%. This number is more than 6% for India and more than 12% for Nigeria. When countries are borrowing to fund fiscal deficits, debt sustainability, which is also a function of borrowing costs, is always a big determinant of the fiscal stimulus a country can provide.

Lag in vaccination in poorer countries will continue to generate headwinds for growth

The reason Covid-19 pandemic is different from any other economic crisis is that economic recovery is also contingent on there being no fresh outbreak of infections. India’s growth forecast for 2021-22 has been cut by IMF from 12.5% to 9.5% after the second wave of infections. There was a level playing field on this count as long as vaccines for Covid were not available. This is not the situation anymore. There is a huge difference between the pace of vaccination in rich and poor countries as the later struggle with sourcing and affordability issues. Countries that placed bulk orders even before the vaccines were proven successful -- a function of resources, research ability, a well developed pharma sector, and the presence of local vaccine manufacturers -- have had an advantage over others in sourcing vaccines.

According to the July WEO update of IMF, 34.7% of the population of advanced countries have been administered vaccines so far, compared to just 9.8% and 1.1% in emerging markets and low-income countries.

A blog by IMF chief economist Gita Gopinath has identified vaccination progress as the critical factor behind growth upgrades and downgrades compared to the April projections. “Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of COVID-19 cases in some countries, notably India, have led to downgrades”, Gopinath wrote. As of July 29, 10.4% of India’s adult population had received both doses of the Covid-19 vaccine, while another 26.9% had received their first dose.

Employment loss has been bigger for the poor workers and poor countries

An inequality in growth recovery is not the only fallout of the pandemic. In India, there has been ample evidence of what has been termed as a profit-led as opposed to a wage-led recovery. As the fear of infections and new waves persists, blue collar workers, especially in contact-intensive industries continue to suffer more than their white-collar counterparts. The latter have the luxury of working remotely.

The IMF update has also underlined this fact. “Moreover, the employment recovery is highly uneven, with youth and low-skilled workers across economies and women in emerging market and developing economies remaining harder hit”, it said. “A combination of factors may explain why employment rates remain subdued. They include a continuation of the health crisis, which still prevents a full reopening, workers’ concerns about health risks in the workplace, and firms’ reluctance to hire new workers, given lingering uncertainties about the recovery.”

Enjoy unlimited digital access with HT Premium

Subscribe Now to continue reading

    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

Story Saved
Saved Articles
My Reads
My Offers
Sign out
New Delhi 0C
Wednesday, November 30, 2022
Start 15 Days Free Trial Subscribe Now
Register Free and get Exciting Deals