COVID 19: Increased Inequality in Emerging Markets and Developing Economies?

Over the last two decades or so prior to the COVID-19 pandemic, low-income countries and emerging markets have made significant strides in reducing income inequality and increasing life expectancy. However, this pandemic is on the brink of reversing the hefty progress made.

A large barrier these countries have had to face in order to reduce income inequality is the lack of youth involvement, or primarily, those who were unemployed, uneducated, and lacking training. Another obstacle was a gap in education between the rich and the poor and disproportionate economic opportunities for women compared to the higher ones of men. COVID-19 measures have only increased inequality by adversely affecting vulnerable women and workers. To properly assess the extent of inequality in various countries during the pandemic, the International Monetary Fund (IMF) has investigated the relationship between a person’s ability to work from home and the expected drop in GDP of a country.

The logic to this is that the ability to work from home among high-income workers is higher in comparison to low-income individuals. Based on research in the US, sectors that allow the flexibility to work from home saw a smaller rate in layoffs. Therefore, it can be concluded that lower-income workers are more likely to lose their jobs because of this pandemic which inadvertently increases income inequality in a country.

Taking into consideration the ability to work from home and GDP, researchers then used the Gini coefficient to enumerate the income inequality. The Gini coefficient is an economic measure of income distribution where a high coefficient indicates greater inequality. The result shown was that higher-income individuals (consequently, with the flexibility to work from home) received a much larger percentage of the population’s total income. The numbers do not bode well for the economy because it shows that the estimated effect of this pandemic on income distribution is unprecedented and far greater than past ones. As for emerging market economies and developing countries with low income, there is a great threat that this income inequality may reverse gains since the financial crisis in 2008.

Source: (Cugat and Narita, 2020)

Based on the chart, the analysis indicates that the average Gini coefficient for emerging markets and developing economies will rise to about 43. The level in 2008 also indicates a similar figure. The impact would be larger for low-income developing countries, which have produced a higher Gini coefficient despite slower progress since 2008. Comparatively, research also shows that advanced economies only produce an average Gini coefficient of about 30-32, clearly indicating a much smaller income inequality.

What can be done?

The government should invest in retraining and reskilling programs to boost employment and countries should be looking into digitalization. This is especially so for Small Medium Enterprises (SME) because digitalization is key to sustaining their business amidst this pandemic. Governments should also expand access to the Internet, especially to the rural areas of their country.

Implementing policies targeted to reduce income inequality will go a long way in ensuring a more equitable future post-pandemic.

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About the Author

Praveena Sekar

Praveena Sekar is Year 2 student currently reading Economics at the University of Nottingham Malaysia. She loves reading and chasing sunsets as often as she can. Occasionally, she cracks a bad pun or two to annoy her friends. She hopes to publish Economics content in a reputable journal someday.