Severe downturns in labour-intensive sectors spell trouble for global inequality
The global economic downturn caused by the COVID-19 pandemic is shaping up to be the worst since the tragically consequential Great Depression. Countless comparisons have been made between the current economic situation and the global financial crisis of 2008. Although similar in terms of their impact, especially on employment and income, key differences make the current crisis particularly dangerous.
The global financial crisis began in 2008 with the bursting of the housing bubble in the United States accompanied by the subprime mortgage meltdown. The collapse of major banking institutions followed, along with a precipitous fall on stock markets across the world and a credit freeze. Bankruptcies increased, credit dried up and unemployment skyrocketed. This was the beginning of the Great Recession.
This time, soaring unemployment came first as many businesses were forced to shutter because of nationwide lockdowns in most developed economies. Rising unemployment and shrinking revenues are choking the demand for products and services, which will inevitably lead to sharp increases in bankruptcies and even more lay-offs.
Millions of low-skilled workers employed in retail trade, restaurants, sports and recreation became the first casualties, as the pandemic containment measures largely shut down economic activities in these sectors.
The pandemic is disproportionately hurting those who are least able to withstand an economic shock—low-skilled, low-wage workers both in formal and informal sectors. While benefits of an economic boom trickle up, the losses from a crisis trickle down, with the poor and the most vulnerable in societies absorbing most of the setbacks.
The negative distributional consequences of the pandemic are likely to be more pronounced than the global financial crisis in terms of scope and magnitude, as low-income households will be hit simultaneously both on the economic and health fronts.
Travel and Tourism
Tourism and travel were the first, direct casualties of COVID-19. The UN World Tourism Organization projects a 20–30 per cent decline in international tourist arrivals in 2020, worlds apart from the four per cent decline in 2009, in the direct aftermath of the global financial crisis.
Likewise, the International Air Transport Association (IATA) estimates a 38 per cent drop in passenger traffic in 2020, compared to the 2019 levels, which translates into $252 billion revenue loss from passengers.
If global tourism—a sector that employs more than 300 million people—were to collapse, the consequences would be catastrophic for the poorest. The loss of income—combined with limited opportunities to find jobs in other sectors of the economy—would lead to higher levels of poverty and inequality in most tourism-dependent economies across the developing world.
The COVID-19 pandemic is also taking a major toll on the manufacturing sector, which employs over 460 million people worldwide. As the pandemic continues to spread, manufacturing activities have stalled or are slowing down around the world, with many economies seeing their manufacturing sectors contracting in March.
Global manufacturing was already under pressure from the rising trade tensions. A prolonged economic crisis, with reduced global demand, especially for durable goods, would suppress real wage growth and inevitably lead to higher income inequality in many developing countries.
The fall of manufacturing activities could spill over across national borders through the global trade networks. Such a spillover effect would be potentially disastrous for global manufacturing, as nearly half of the world’s exported goods and services either involve inputs from more than one country or are later to be—upon further processing—part of future exports from the importing countries.
With shrinking exports revenues from tourism, commodities and manufactured goods, developing countries are facing significant fiscal space constraints that prevent them from effectively mitigating the pandemic’s adverse impacts, including on rising inequality.
It is therefore imperative that when development partners consider debt restructuring, moratorium and other reliefs, tourism- and commodity-dependent economies receive additional financial support. The support must come as soon as possible, not three months later. Any delay will mean an amplification of the catastrophic impact of rising economic inequality, severely limiting the prospects of sustainable development.
Access the May Monthly Briefing on the World Economic Situation and Prospects to learn more.