Published on World Bank Voices

Here’s a remedy for COVID’s legacy of growing inequality

Portrait d'un jeune enfant faisant ses devoirs et souriant à la caméra. Yaw Niel/Shutterstock
Photo credit: Yaw Niel/Shutterstock

We are seeing early signs of global recovery in economic output, global mobility, and international trade. But the latest Global Economic Prospects (GEP) edition presents a troubling picture: worsening inequality that the COVID-19 pandemic has exacerbated, and that is likely to be hard to cure in the short and medium term.

Both the GEP, launched earlier this month, and the World Bank High-Frequency Phone Surveys included in the COVID-19 Household Monitoring Dashboard show the effects of the pandemic nearly two years after it began, shedding light on the trajectory of poverty and inequality.

The GEP analysis presents three broad and worrisome trends: income inequality across countries (international) and within countries (domestic), and inequality of opportunity (interpersonal).

Recovery is very uneven across countries. There are some clear trends that show a stark difference in how recovery is progressing, with global inequality levels now closer to what they were 10 years ago. 

During the pandemic, decreased income, job loss, and work stoppages were especially damaging in the developing world. In the countries covered by the surveys, over 60 percent of respondents reported losing income (this figure was 70 percent in low-income countries). Job losses and work stoppages were experienced by around a third of respondents across regions, and this number was closer to half in Latin America and the Caribbean.

Policy responses to these disruptions are a key driver of recovery. These have come primarily in the form of social assistance measures (such as financial relief toward basic needs), social insurance measures (such as job-loss and health support), and labor market policies (such as changes in labor rules and incentives). While social assistance measures were implemented in over 80% of surveyed countries, the surveys found that only an average of 22 percent of respondents received any form of government support, a figure that is even lower for low-income countries.  

An Oxfam study found that 87% of surveyed economists who focus on inequality agreed that within-country inequality is on the rise. Over the last two decades, the Gini index, used to express in-country income inequality on a scale from 1 to 100, had declined by 2 points on average in developing countries. In a reversal of these positive gains, the index is estimated to have increased by an average of 0.3 points in 34 countries across the developing world as a result of the pandemic.

Changes in within-country inequality are more driven by structural issues than external factors such as the pandemic, which is why we only observe a modest increase anchored in the patterns of existing inequalities. These domestic inequalities are particularly caused by the heavier impact of COVID on people in the more vulnerable categories of the population, such as low-wage and informal workers, and women. Conversely, jobs that could easily adopt digital adaptations (and that tend to require higher levels of formal education), offered solidified financial stability to their workers.

The pandemic was especially hard on the bottom 40% of households in urban areas, which did much worse than the poorer segments in rural areas, since agriculture was not as heavily impacted as other sectors.

Likely the longer lasting and most troubling effect is inequality of opportunity. This indicates the unequal chances of some groups to achieve their full academic, professional, and human potential regardless of their own effort and due to circumstances beyond their control, such as their parents’ socioeconomic status. This represents wasted potential not only for people and their communities, but for their societies at large. While social mobility had made strides in past decades, much of that progress has been reversed as the pandemic solidified existing barriers for poorer children and youth, both by making their position weaker but also because their parents are in more precarious financial situations that prevent investments in longer-term human capital assets like education.

The survey results show that, in low-income countries, only 39 percent of children who were attending school before the pandemic engaged in any learning or education activities since school closures.

Regarding health care, vaccines for COVID-19 have been available for over a year, but remain unequally distributed, making recovery a mirage for some, while giving a more optimistic outlook to others.

What does this mean for the future?

The macroeconomic imbalances derived from the pandemic are also expected to generate high inflation, which will exacerbate within-country income inequality in developing countries. The effect of inflation can be mitigated through redistributive public policies that can level the playing field in terms of access to services like high-quality education and health care, and by relieving financial stress on households through social assistance programs. The rising levels of public debt faced by developing countries, however, are not likely to encourage an abundance of such measures.

The past two years of pandemic have had lasting effects on intergenerational mobility: Children lacking equal opportunities in education are at a severe disadvantage in achieving their full potential academically , resulting in lower professional productivity as they grow into adulthood. That means lower incomes, but also higher levels of precariousness and decreased financial stability, access to finance and to investment opportunities in both entrepreneurial ventures and self-improvement.

Heavier reliance on digital technology in private sector, government services, and education offers many opportunities. But an important risk of over-reliance on digitized services is losing track of the most vulnerable population, which could be left behind in this transition.

To achieve an inclusive path that can reverse the inequality trajectory of the pandemic aftermath, developing countries must build the objectives listed above into their domestic recovery policies, and they will need to count on the support of the international development community.

The most immediate action to mitigate inequality across countries is a faster global vaccine rollout, lifting of travel restrictions, and efforts to improve debt sustainability.

Support to improved government revenue collection capacity can ease the tax burden on vulnerable groups. That would also expand the financing for more redistributive public policies focused on social assistance and investment in growing human capital through early childhood development, universal access to quality education and health care, as well as targeted social transfers, effective labor market policies, and investments in rural infrastructure that improve connectivity to services, markets, and opportunities for isolated populations.

The effects and future threats from climate change represent an additional challenge in adaptation, remedial action, and disaster relief that developing countries are especially ill-equipped to finance. Supporting developing nations in this process is a clear avenue for international financial institutions to add value and have direct impact on the vulnerable populations that are disproportionately affected and reverse the inequality trap of the generations to come.

Watch live on Jan. 24 as World Bank Managing Director Mari Pangestu and a distinguished panel discuss COVID-19 and Rising Inequality


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Authors

Carolina Sánchez-Páramo

Director, Strategy and Operations, Europe and Central Asia

Silvia Malgioglio

Social Scientist, Poverty and Equity Global Practice

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