Why Covid-19 Exacerbates Inequalities and What to do About It

Wail M. Aaminou

14 Sep, 2020

In a nutshell

Covid-19 exacerbates inequalities and pre-existing socioeconomic disparities, thereby threatening the stability of many countries Inequalities’ transmission factors include education, job exposure to infections, job availability, housing, transportation and safety nets Supporting the income of disadvantaged households and boosting job supply should be the priority. Impact finance and philanthropic funds, such as zakah and waqf, are important in complementing government-supported mechanisms

Inequalities were already booming before Covid-19

Inequalities in the world have increased to reach dangerous proportions since the late 1980s, after entering the post-communist and hyper-capitalist world (cf. Figure1).

The share of the top decile (the 10% highest incomes) in total national income ranged between 26% and 34% in 1980 in different parts of the world, and from 34% and 56% in 2018. Inequality increased everywhere, but the size of the increase varies greatly from country to country, at all levels of development. For example, it was greater in the United States than in Europe (enlarged EU, 540 million inhabitants), and greater in India than in China.

Inequalities are dangerous from social and economic standpoints. Research has shown that health and social problems are strongly correlated with inequality (cf. Figure 2). It goes without saying that health and social issues undermine economic growth.

Covid-19: An amplifier of inequalities
Even if Covid-19 crisis is systemic in nature, unfortunately, the pandemic affects disproportionally low-income households (LIHs) through the following factors:

Online education constraints
Governments were obliged to move to online education to slow the virus spread during lockdown. Although many countries eased lockdown measures, it is not clear when education will resume to the normal face-to-face setting. Therefore, in the short run, either online education will continue or there will be a form of hybrid mode where online education plays an important role.
Online education puts LIHs at significant disadvantage in multiple ways:

• Online education requires investments in computers (one per student), printers and internet access, which is beyond the means of most LIHs (large families on average).
• Rural areas where low-income households are more present usually lack high bandwidth internet access necessary for using online streaming and video content.
• Online education requires basic computer skills (digital literacy), which not all children and their parents (who play an important role in supporting their kids in online education) have.
• Online education at home requires having enough space. LIHs usually live in overcrowded houses (cf. infra).

In sum, because low-income families often lack the necessary requirements for online education, such an education mode not only drains the income of LIHs but is also ineffective.

Housing with higher density and poor sanitation conditions
Compared with other groups, LIHs live on average in houses that are more overcrowded and often do not respect the minimum requirements in terms of space, ventilation, and sanitation. Additionally, LIHs houses are located in dense neighbourhoods, a fertile environment for the spread of viruses.
Inadequate housing in dense neighbourhoods makes LIHs more exposed to Covid-19 infections. Moreover, recovering from Covid-19 in inadequate housing is challenging from both physical and psychological standpoints.

Jobs exposure to Covid-19 infections
Compared with other groups, LIHs are less likely to work from home. LIHs occupations involve more face-to-face interactions. Inversely, high-income workers disproportionately hold jobs adapted to telework. Obviously, cashiers, janitors and security agents cannot work from home. As a result, because of the nature of the jobs they are more likely to have, LIHs are more exposed to Covid-19 infections.

Jobs availability

Compared with other groups, LIHs are more likely to be laid off because of the economic crisis, as they are over-represented in the informal economy and in temporary occupations.

Safety nets / supporting mechanisms

On average, LIHs also lack safety nets (insurance coverage, unemployment benefits, etc.), which makes the income fluctuations due to Covid-19 hard to manage. In addition, LIHs, being important beneficiaries of remittances, are most significantly affected by the sharp decline of these transfers during the pandemic (20% drop in 2020 according to the World Bank).

Reliance on public transportation

On average, LIHs are more likely to rely on public transportation, which increases the risk of infection.  Furthermore, the limitation of public transportation during lockdown hampers their possibility of finding new jobs and business opportunities.

Lack of access to healthcare prevention & treatment

LIHs have a lower access to Covid-19 prevention means (hands sanitizers, masks, etc.). In addition, the access of these households to healthcare facilities is negatively impacted by the limitation of insurance coverage and social assistance.

Dynamic modelling of inequalities during the Covid-19 pandemic

In this basic system dynamics simulation, I model the interactions between the factors that amplify inequalities for low-income households (in the short run). The signs “+” and “-” show respectively a positive and a negative impact of a variable on another.

Except “Online education constraints”, most effects on LIH income are operating by passing through the “Work time/Job opportunities” factor. In the model, “Safety nets” is an exogenous factor.

In dynamic modelling, self-reinforcing loops exponentially amplify the impact of factors on the target variable (LIHs income). According to Figure 6, these loops are as follows:

• Transportation safety →   Exposure to Covid-19 → Work time/Job opportunities → LIH income → Transportation safety (Yellow loop)
• Healthcare prevention & treatment →   Exposure to Covid-19 → Work time/Job opportunities → LIH income → Healthcare prevention & treatment (Green loop)
• Housing conditions →   Exposure to Covid-19 → Work time/Job opportunities → LIH income → Housing conditions (Blue loop)

How to tackle inequalities generated by Covid-19?

Acting upon all input factors alleviate inequalities. However, the priority should be given to transforming self-reinforcing loops from vicious into virtuous circles. Hence, I believe that supporting the income of LIHs and increasing the supply of work time and job opportunities should be the priority in the short run.

To some extent, governments have been successful in supporting LIHs. Examples include direct cash transfer, wage subsidies, food aid, unemployment benefits, mortgage relief and the deferment of utility bills and rent payments. Obviously, these efforts must be sustained. However, if this crisis continues for long, governments will not have the means to allocate more resources unless they do so at the expense of worsening macro-economic indicators. So, what else can be done?

Basically, we are left with two options that can be combined:

Impact finance

Mobilizing more funds from the private sector to invest and finance sectors with a dual approach that generates profit for investors while addressing social issues, for instance:

• Economic empowerment of micro-entrepreneurs
• Funding healthcare and education infrastructure through private and public partnerships

While this approach can be interesting, investors are faced with two issues:

• In the current context, the private sector in general and financial institutions in particular are also under pressure. In addition, assets’ volatility is, on average, higher
• Social impact usually takes time to materialize (time lag) and is hard to measure (I am referring to the measurement of impact not of outputs / outcomes)

A better mobilization of philanthropic funds

In the context of OIC countries, instruments such as waqf and zakah have a huge potential to raise social funds. For instance, zakah can mobilize, on average, 3% of the region’s GDP, which amounts to around US $ 10 billion annually! (cf. Islamic Social Finance Report 2020). However, because of lack of supporting institutional environment and infrastructure, such much-needed resources are lost. To unleash the potential of zakah and waqf, first a strong political will is necessary to build supporting institutions and infrastructure. Second, zakah and waqf institutions should be at par with international best practices in terms of asset management, human resources management, marketing and technology. Third, communication, transparency and accountability, which are key in alleviating trust-deficit vis-à-vis ordinary citizens, can hardly be overemphasized. Finally, waqf and zakah institutions should foster synergies with Islamic financial institutions to develop innovative financial instruments as in the case of blended finance. To illustrate, mobilising waqf funds in the current context would allow Islamic banks to finance “below market return” investments in relation to online education and Covid-19 testing facilities.

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