Govt policies can help as Covid-19 boosts inequality: ADB

The coronavirus pandemic has worsened inequality on many fronts and there is a need of pro-active macroeconomic policy combined with labour retraining programmes and increased social protection.

According to the Asian Development Bank (ADB), developing Asia continues to display varying degrees of economic robustness to the Covid-19 shock, giving rise to an uneven recovery across economies. These divergences in growth paths are reflected in where GDP levels will be in 2022. In the region as a whole, GDP next year is expected to be 2.5% below the pre-pandemic trend. But the gap varies substantially across subregions.

Uneven recovery patterns leading to worsening inequality have also become visible within economies. For instance, there is growing evidence that micro-, small- and medium-sized enterprises in the region are bearing the brunt of the crisis through liquidity shortages and supply-chain disruptions. In the labour market, the crisis is having more adverse effects on workers penalized by lower employment protections-in particular, those who are younger, less educated, or both.

Furthermore, job and income losses due to the pandemic have affected women more severely, undoing decades of progress on gender equality. Systemic gender inequalities that limit women’s access to education, health, and labour markets are being aggravated by the Covid-19 pandemic, and could play a significant role in prolonging the economic fallout on women.

Rising inequality is problematic for many reasons. From an economic standpoint, excessive income inequality harms economic growth through several channels. Inequality is also associated with underinvestment in human capital by individuals on the lower end of the income spectrum-especially in economies lacking good-quality and affordable education systems.

Wealth inequality often goes in tandem with higher financial instability, higher household indebtedness, and more frequent asset price bubbles-especially in economies driven by a dominant financial sector. From a social perspective, high economic disparity can also fuel crime, cause political instability, stifle social mobility, and corrupt politics.

Several policy options are available to address Covid-19-related inequality. Labour policies, such as retraining programmes for displaced and unskilled workers, can encourage mobility towards booming sectors and away from contracting ones. These programmes will also serve the long-term goal of reducing skills mismatch in the labor market and encouraging upward mobility of the low-skilled workers, thus lowering wage-earning inequality over time.

Policy responses to lessen the adverse economic impact on women, which could have persistent effects on female earnings potential, are also needed. Fiscal policy should also play an important role to promote a more equitable society by, for example, extending social protection-such as via targeted transfers-and, more generally, by structuring tax and public spending allocations in ways that would yield more progressive redistributive effects.

Specifically, the COVID-19 crisis calls for governments to commit significant resources to revive the economy with generous fiscal stimulus packages. Monetary policy should not only remain accommodative given the Covid-19 pandemic but also strive to be transparent, systematic, and lucidly communicated to avoid surprises that may unfairly impact the disadvantaged.

Pro-active macroeconomic policy combined with labor retraining programs, social protection, and gender-specific policies are among the essentials needed to address the gaps, concluded ADB.