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The two faces of income inequality: who’ll be hardest hit by the pandemic?


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The following article is authored by Diego Sánchez-Ancochea.
Several pandemics have in the past contributed to the reduction of income inequality. “Disruptive global events have…precipitated shifts towards a more equal distribution of income and wealth” explained recently The Economist. In his bestselling “The Great Leveller”, Walter Scheidel showed that health crises, wars and economic depressions have often triggered progressive redistribution by hitting the wealthy and strengthening the economic bargaining of the working class.
Will this happen this time around?  Is COVID 19 likely to improve the distribution of income?  To answer this question, we must remember that inequality has two different faces.  On the one hand, income can concentrate at the very top, increasing the political and economic influence of the elite. On the other hand, we also witness significant inequality between workers based on their level of education and access to formal employment. 
The pandemic is likely to worsen both kinds of inequality. The consequences may be particularly negative in the global South--where redistribution is weaker and social policy responses face more constraints – but Northern countries are likely to suffer as well. Here I focus on some general patterns, leaving country specificities for future discussions.
The very wealthy were initially hit by the sudden drop in stock market values in March, but have benefited from the subsequent reversal. The S&P 500 has already recuperated 60% of its value--one of the fastest rallies in the last century--in recent weeksUS billionaires are today wealthier than a year ago despite initial losses in the financial markets.  In other parts of the world, the very rich are likely to suffer less than other income groups, and many will actually benefit from growing uncertainty and volatility. The rapid expansion of liquidity by Central Banks could fuel a new stock market bubble--exactly as it happened after the 2009 financial crisis. Low interest rates will allow powerful investors to borrow cheaply and purchase a plethora of financial assets from futures and derivates to stocks in local and transnational companies.
If history repeats itself, two other trends are likely to contribute to income concentration in the near future.  First, large companies – in many countries grouped together in powerful business groups – may be too big to fail. In Mexico, the largest 20 companies generate 2 million jobs--almost 10% of all formal jobs. Letting a leading firm close down quickly becomes a public relations nightmare for any government, given their immediate impact on its workers and suppliers.  Large firms are politically connected and often benefit disproportionally from government aid. In the US, private equity firms are likely to receive ample state support, despite having US$1.5 trillion in cash and being led by some of the best-paid managers in the world.  Second, if in a few months countries start implementing austerity policies--something particularly likely in the cash-strapped global South--the wealthy are also likely to suffer less from tax hikes and the reduction in government spending than the middle class and the poor.
What will happen with income distribution among the remaining 99% of the population--the other face of inequality?  There is growing evidence that low-skilled, poorly paid and/or informal workers are already suffering disproportionally.  In the short run, the lockdown is hitting them particularly hard: they can seldom work from home or expect a steady wage from their employers. In most countries, they have received less government support and struggle to access some promised benefits. Poverty, informality and other deprivations are often interlinked. In Latin America, 80% of individuals in the bottom quintile of the population work in the informal sector.  Almost one fourth of all Latin Americans do not have access to potable water and a third has no access to the internet and many live in low quality housing--with dramatic consequences not only on their income opportunities but also on their health during the pandemic.  Their situation is unlikely to improve in the next few months, particularly if new contagion waves forced countries into new lockdowns. By contrast, highly educated, white collar workers have many more tools to confront the challenges of the pandemic: they can work from home if needed, have larger houses and better internet connections, can access to more and better social services and use their savings in worst case scenarios.
In the long run, we should also be concerned about the asymmetric impact of the pandemic on children. UNESCO estimates that 70% of children and young children have stopped attending school in the last few months. In many countries--both in the global South and North-- public schools in middle class neighborhoods and private schools have successfully moved to online teaching. Yet many other schools have been unable to offer adequate online education and many low-income families have limited or no access to internet. In Vietnam, for example, 25% of poor children have never used a computer or benefited from internet access, compared to just 3% of the richest children.  Closing schools has also prevented poor children from accessing school meals and other supporting programs--a problem already evident in countries like Rwanda and Honduras.  Missing school for a few months will likely have large long term consequences on the poor, increasing dropout rates and weakening children’s performance in the future. In this way, today´s economic and health crisis could harden inequality between low-income groups and the upper middle class. 
Given the two faces of inequality, the optimum policy solution seems clear: we should increase direct taxation on the wealthy and use the extra income to finance cash transfers and health care support for the poor. Would that be right solution?  Yes and no.  This is clearly the moment to tax the wealthy if we want to expand public services and confront income inequality while securing long-term fiscal sustainability. “Progressive taxation – from corporate profits, and from personal income and wealth – is the only sustainable way to fund the public services and infrastructure on which restoration depends”--recently argued the billionaire and founder of the international campaign Move Humanity, Djaffar Shalchi. Yet providing social benefits for the poor alone may not be enough. In most countries, the economic crisis has also hit the lower middle class as millions of people lose their jobs and family business go bankrupt. In Costa Rica, for example, Juliana Martínez Franzoni estimates that around 44% of the population--the 24% already poor plus another 20% non-poor-- do not make enough to survive and require public support.  Politically, creating a broad social coalition between the poor and large segments of the middle class may be the only way to secure the kind of social pressure required to expand social programs significantly, create new taxes on the wealthy and thus stop the otherwise inevitable worsening of the two faces of income inequality.

Diego Sánchez-Ancochea is Head of the Oxford Department of International Development and Professor of the Political Economy of Development at the University of Oxford. He specialises in the political economy of Latin America and his research interests centre on the determinants of income inequality and the role of social policy in reducing it.
The author is responsible for the facts contained in the article and the opinions expressed therein, which are not necessarily those of UNESCO and do not commit the Organization.