Digitalization has in the past few years enabled developing countries in particular to leapfrog on financial inclusion. Countries like Kenya, Ghana, Rwanda and Tanzania have made great advances in connecting their citizens to financial systems by leveraging on mobile phone technology. (more…)
The pandemic-induced economic crisis is set to leave deep scars. Human capital erosion from prolonged high unemployment and school closures, value destruction from bankruptcies, and constraints on future fiscal policy from elevated public debt top the list. (more…)
Emerging markets and developing economies grew consistently in the two decades before the COVID-19 pandemic hit, allowing for much-needed gains in poverty reduction and life expectancy. The crisis now puts much of that progress at risk while further widening the gap between rich and poor.
Despite the pre-pandemic gains in poverty reduction and lifespans, many of these countries have struggled to reduce income inequality. At the same time, they saw persistently high shares of inactive youth (i.e., those not in employment, education, or training), wide inequality in education, and large gaps remaining in economic opportunities for women. COVID-19 is expected to make inequality even worse than past crises since measures to contain the pandemic have had disproportionate effects on vulnerable workers and women.
As part of our latest World Economic Outlook we explore two facts about the current pandemic to estimate its effect on inequality: a person’s ability to work from home and the drop in GDP expected for most countries in the world.
The impact of where you work
First, the ability to work from home has been key during the pandemic. A recent IMF study shows that the ability to work from home is lower among low-income workers than for high-income earners. Based on data from the United States, we know that sectors with activities more likely to be performed from home saw a smaller reduction in employment. These two facts combined tell us that lower-income workers were less likely to be able to work from home and more likely to lose their jobs as a result of the pandemic, which would worsen the income distribution.
Second, we use the IMF’s GDP growth projections for 2020 as a proxy for what the aggregate decrease in income will be. We distribute this loss across income brackets in proportion to their ability to work from home. With this new income distribution, we compute a post-COVID summary measure of income distribution (Gini coefficient) for 2020 for 106 countries and compute the percent change. The higher the Gini coefficient, the greater the inequality, with high-income individuals receiving much larger percentages of the total income of the population.
What this tells us is the estimated effect from COVID-19 on the income distribution is much larger than that of past pandemics. It also provides evidence that the gains for emerging market economies and low-income developing countries achieved since the global financial crisis could be reversed. 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 will suffer
This widening inequality on average has a clear impact on people’s well-being. We assess the progress made before the pandemic and what we can expect for 2020 in terms of welfare using a measure that goes beyond GDP. We use a welfare measure that combines information on consumption growth, life expectancy, leisure time, and consumption inequality. Based on these measures, 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, suggesting many aspects of peoples’ lives were seeing improvement. The increase was mostly due to improvements in life expectancy.
The pandemic could reduce welfare by 8 percent in emerging markets and developing countries with more than half of it stemming from the excess change in inequality as a result of a person’s ability to work from home. Note that these estimates do not reflect any income redistribution measures after the pandemic. This means that countries can dampen the effect on inequality and on welfare more generally by policy actions.
What can we do about it?
In our latest World Economic Outlook, we outlined some policies and measures to support affected people and firms that will be essential for keeping the inequality gap from widening further.
Investment in retraining and reskilling programs can boost reemployment prospects for adaptable workers whose job duties may see long-term changes as a result of the pandemic. Meanwhile, expanding access to the internet and promoting financial inclusion will be important for an increasingly digital world of work.
Relaxing eligibility criteria for unemployment insurance and extending paid family and sick leave can also cushion the impact the crisis is having on jobs. Social assistance in the form of conditional cash transfers, food stamps, and nutrition and medical benefits for low-income households must not be withdrawn prematurely.
Policies to prevent decades of hard-won gains from being lost will be critical to ensuring a more equitable and prosperous future beyond the crisis.
This blog draws on the work 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 here do not necessarily represent the views of the FCDO.
Leaders are often called upon to “rise to the challenge” in times of crisis. As firms and their leaders rise as best they can amid the ongoing health and economic crises, yet another crisis lies on the horizon. A looming environmental crisis, obscured by the exigency of the pandemic, requires action be taken by firms (and others). So how will business leaders and companies respond?
Our latest analysis looks at past episodes of financial and economic stress to gauge the likely impact of the current crisis on firms’ environmental performance.
On the one hand, the COVID-19 pandemic could increase awareness of environmental risks and bring about a shift in consumer preferences, corporate actions, and investor behavior that could accelerate the transition to a low-carbon economy. On the other hand, there is a risk that financially weakened firms, amidst heightened economic uncertainty, will reduce their investments in long-horizon, capital-intensive green projects, slowing down the transition.
Past as predictor
Looking at a large international sample of listed firms over the period 2002 to 2019, our analysis shows that the environmental performance of financially constrained firms is significantly weaker than for unconstrained firms.
Our analysis incorporates various factors that commonly serve as proxies for financial constraints—smaller, unrated firms are more likely to be financial constrained than are larger firms with ratings. Similarly, firms that are financially constrained may be less willing to pay out dividends. Our main measure of environmental performance is a score based on various key performance indicators, such as resource usage, emissions reductions, and product innovation.
For firms that do not pay dividends, are not rated, or are smaller, the environmental performance score is, on average, 10 to 30 percent lower than the score of large, dividend-paying, or rated firms.
A shock with large macroeconomic and financial implications, such as the COVID-19 pandemic crisis, increases uncertainty and disrupts economic activity, a development that tends to amplify firms’ financial constraints. This, in turn, is likely to adversely affect firms’ green investments.
As shown in our chart of the week, a sudden jump in global financial stress and uncertainty—comparable to the average level that prevailed in the first half of 2020—would lead to a drop in firms’ environmental performance, reversing gains made over the last decade. Critically, the pre-shock environmental performance level is not regained even three years after the shock. Similarly, our analysis found that when economic output declined, so too did firms’ environmental performance.
These results have important implications in the context of the COVID-19 crisis and the urgent need to reduce global greenhouse gas emissions:
First, absent climate policy actions, such as a green investment push as called for in the recent World Economic Outlook, tighter financial constraints and adverse economic conditions can be detrimental to firms’ environmental performance, reducing green investments, and potentially slowing down the transition to a low-carbon economy. Therefore, to offset any potential deterioration in firms’ environmental performance, it will be crucial to put in place climate policies that alleviate firms’ financial constraints and aid green investment.
Second, in addition to green recovery packages, policies aimed at fostering sustainable finance will be key:
Comparable, consistent corporate reporting on sustainability would enable a more effective assessment of firms’ environmental performance. Only accurate and adequately standardized reporting and disclosure will allow investors to determine actual exposures of companies to climate-related financial risks.
It is important to instill confidence in investors that sustainability be not just an attractive label, but that it reflect underlying sustainable investment decisions. To achieve that, further standardization and clarification of what constitutes a sustainable investment fund is needed.
International cooperation and a collaborative approach to the initiatives taking place globally are crucial to leverage efforts and to avoid fragmentation of sustainable asset markets. The IMF will be contributing to this endeavor.
After the unprecedented hit to economic activity in emerging market economies from the COVID-19 pandemic, their economic output is projected to shrink by 3.3 percent in 2020. (more…)