COVID had a surprising impact on income inequality: It went down

Much of what we thought we knew about the pandemic’s economic impact appears to be wrong.

So says Nobel Prize-winning economist Angus Deaton, a professor at Princeton, based on a new analysis of worldwide COVID-19 data through 2020. Among the surprises he found:

  • There’s no tradeoff between saving lives and saving the economy, despite the opposite widespread belief among policymakers.
  • The pandemic has not increased inequality among countries; it has decreased inequality when each country is regarded as an equal unit, regardless of size.
  • When countries are weighted by population, the pandemic has indeed increased inequality—but not because poor countries got poorer. It’s because China got richer.

All these results directly oppose widely held views that seem to make sense. The notion that the pandemic is increasing income inequality among nations has been asserted as fact by the World Economic Forumthe United Nations, and another Nobel-winning economist, Joseph Stiglitz. Explaining why COVID-19 has “exacerbated inequalities between countries,” he wrote last September that “the least developed economies have poorer health conditions, health systems that are less prepared to deal with the pandemic, and people living in conditions that make them more vulnerable to contagion, and they simply do not have the resources that advanced economies have to respond to the economic aftermath.”

Deaton acknowledges that “this argument seems compelling”—but, he adds, “it is good to check out the data.” So that’s what he did.

He assembled data on COVID-19 deaths, per-capita income, and various growth forecasts for virtually all the countries in the world (nearly 200).  This showed that countries with the most COVID-19 deaths per million population suffered the steepest declines in per-capita income. That may sound obvious, but it is by no means obvious. On the contrary, much conventional thinking has been just the opposite – that lockdowns save lives but crush the economy. Not so.  Deaton says, “The route to growth lies through stopping deaths. It is not a matter of your money or your life, but your money and your life.”

Then he found an even bigger surprise: Poorer countries have suffered fewer COVID-19 deaths per million people than have richer countries. This seems so bizarre that you have to wonder if the data is reliable. Deaton notes that deaths may well be undercounted in some countries. But he also cites reasons – just hypotheses so far – why poorer countries might suffer fewer COVID-19 deaths. Their populations are much younger. They tend to be warmer countries, “where much activity takes place outside, and there are relatively few large cities with elevators and mass transit.” Some have argued that Africa’s long experience with infectious epidemics has been a strength.

Thus the counterintuitive finding about inequality. Per-capita income has declined most in countries with the most COVID-19 deaths per million people – but those countries aren’t the poorer countries, as everyone had assumed. They’re the richer countries. Which is why the data shows that incomes have declined more in richer countries than in poorer countries, reducing inequality.

But wait – surely it makes more sense to weight countries by population. Luxembourg just isn’t as significant as China. When Deaton weighted each country appropriately, he found that inequality did indeed increase – but the explanation revealed yet another surprise. Inequality isn’t widening because the pandemic “is impoverishing poor countries by more than the better-protected rich countries,” he writes, though that is what virtually everyone believed would happen. It’s happening “entirely because of China.” For decades China’s surging economy reduced international inequality because its vast, poor population was prospering. But China isn’t poor anymore. Most of the world’s people “now live in countries poorer than China,” Deaton reports. So when China gets richer, as it did again last year, it now increases inequality among nations.

Deaton acknowledges that his findings “may be temporary.” The pandemic is far from over. And his data is pre-vaccine; varying distribution of vaccines could change his results. For now, his research is another reminder of how much we still don’t know about this fundamentally new phenomenon, a 21st-century global pandemic.

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