How COVID-19 Will Increase Inequality in Emerging Markets and Developing Economies

IMF Blog, October 29, 2020

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Canonical URL: How COVID-19 Will Increase Inequality in Emerging Markets and Developing Economies

Authors: Gabriela Cugat, Futoshi Narita
Date: October 29, 2020
Summary: Emerging markets and developing economies made sustained gains in poverty reduction and life expectancy in the two decades before COVID-19, but many struggled to reduce income inequality, faced high shares of inactive youth, wide inequality in education, and large gender gaps in economic opportunities. The COVID-19 crisis risks reversing much of the progress and widening the gap between rich and poor.

Key facts used to estimate effect on inequality:
- Ability to work from home is lower among low-income workers than for high-income earners.
- Sectors with activities more likely to be performed from home experienced smaller employment reductions (evidence from the United States).
Implication:
- Lower-income workers were less likely to be able to work from home and more likely to lose their jobs, worsening the income distribution.

Approach:
- Use the IMF’s GDP growth projections for 2020 as a proxy for aggregate decrease in income.
- Distribute this loss across income brackets in proportion to their ability to work from home.
- Compute a post-COVID summary measure of income distribution (Gini coefficient) for 2020 for 106 countries and compute the percent change.
Interpretation of Gini:
- The higher the Gini coefficient, the greater the inequality, with high-income individuals receiving much larger percentages of total income.
Findings:
- The estimated effect from COVID-19 on the income distribution is much larger than that of past pandemics.
- The analysis shows that the average Gini coefficient for emerging market and developing economies will rise to 42.7, which is comparable to the level in 2008.
- The impact would be larger for low-income developing countries despite slower progress since 2008.

Welfare measure:
- Combines information on consumption growth, life expectancy, leisure time, and consumption inequality (goes beyond GDP).
Historical change:
- From 2002 to 2019, emerging markets and developing economies enjoyed welfare growth of almost 6 percent, which is 1.3 percentage points higher than per capita real GDP growth.
- The increase was mostly due to improvements in life expectancy.
Pandemic effect:
- The pandemic could reduce welfare by 8 percent in emerging markets and developing countries.
- More than half of this reduction stems from the excess change in inequality as a result of a person’s ability to work from home.
- These estimates do not reflect any income redistribution measures after the pandemic, meaning policy actions can dampen the effect on inequality and welfare.

Support labor market transitions:
- Invest in retraining and reskilling programs to boost reemployment prospects for adaptable workers whose job duties may see long-term changes.
Expand digital and financial inclusion:
- Expand access to the internet and promote financial inclusion for an increasingly digital world of work.
Strengthen social insurance and leave policies:
- Relax eligibility criteria for unemployment insurance and extend paid family and sick leave to cushion job impacts.
Protect social assistance:
- Maintain social assistance in the form of conditional cash transfers, food stamps, and nutrition and medical benefits for low-income households; avoid premature withdrawal.
Rationale:
- These measures are essential for keeping the inequality gap from widening further and for preventing decades of hard-won gains from being lost.

The blog draws on research conducted under a research collaboration on macroeconomic policy in low-income countries supported by the United Kingdom’s Foreign, Commonwealth and Development Office (FCDO).
The views expressed do not necessarily represent the views of the FCDO.

Source: IMF blog post “How COVID-19 Will Increase Inequality in Emerging Markets and Developing Economies,” October 29, 2020.