How has the COVID-19 pandemic affected income and wealth distribution? Since 2020, the pandemic appears to have exacerbated inequality across the world. Data from the World Bank suggest that the income gap between emerging markets and developed countries has widened from 2019 to 2021. Soaring inflation and public debt have limited the ability of low-income countries to support vulnerable groups. Unemployment and income loss seem to be a problem for the poor rather than the rich.
This situation is similar to what happened during previous financial crises. After the 1997 Asian financial crisis, the share of wealth held by the top 10 percent surged in Singapore and Indonesia. One explanation is that the wealthy benefited from the financial market chaos by being able to identify and buy high-quality assets that were undervalued. The rich are always better informed as they can hire the best financial advisers. Macroeconomic policies often work in their favor. The massive stimulus package early on during the pandemic in the developed world had pushed up the property and stock markets — the rich tend to hold a much higher percentage of their wealth in such assets.
The same is true of Hong Kong, China’s most affluent region. During the 2008 financial crisis, quantitative easing in the US led to massive capital inflows to Hong Kong, inflating housing and stock markets. The poor often hold most assets in cash and thus couldn’t benefit from the appreciation in financial assets. The Hong Kong Special Administrative Region government vowed to reduce inequality through social policies. From 2011 to 2021, the share of social welfare as a percentage of total government spending rose from 16.3 percent to 20.4 percent. During COVID-19, the social assistance leaned toward the elderly and the poor. However, with a tax cap of 17 percent on personal income and no tax on capital gains, the city is a tax haven for the rich. Stubbornly high housing prices also have limited the government’s ability to redistribute wealth.
The good news is that the post-COVID-19 inequality may not be a persistent phenomenon. In 2022, Europe and the US witnessed the best job market in 30 years, with many industries constantly facing labor shortages. Labor unions expanded significantly, resulting in widespread wage renegotiations and pay raises, driving up inflation. In response, most Western central banks have been hiking interest rates since 2021 to combat inflation. Real estate markets were restrained and the stock market retreated, causing the wealth of the rich to shrink.
The French economist Thomas Piketty studied historical data from 23 countries in the 20th century and found that economic crises usually did not have a long-term impact on inequality. It was the policy responses, rather than the business cycles, that determined inequality in the long run, he said. For instance, after the Great Depression (1929-39), the inequality across developed countries declined. In the United States, the top 10 percent accounted for 50 percent of the national income in 1928, but the number dropped to 35 percent in the 1950s and further down to the lowest point of 27 percent in 1978.
Policy responses played a decisive role in this transition. During the Great Depression, the number of big companies filing for bankruptcy surged, destroying much wealth for the rich. Instead of bailing them out because they are “too big to fail”, the government decided to let them go bust and tighten regulations in the following years. Today’s world is different. Governments tend to save big institutions at all costs to avoid panic or an immediate political backlash. Recently, the response from the US Federal Reserve and Treasury after the failure of Silicon Valley Bank precisely demonstrated the moral hazard of saving big banks. Instead of punishing the wrongdoings, the bank was guaranteed a full bailout on its deposits. Such a regulatory practice will aggravate wealth inequality because those who took excessive risks in the capital market will benefit, while those following the rules lose.
Moreover, the architecture of the financial system is becoming more intricate and interdependent, as seen by the presence of tax havens and the loopholes associated with stock option deductions. Without government intervention, the pursuit of efficiency in the capitalist world will naturally lead to higher inequality.
Ever since the opening-up and reform started in 1978, China has been prioritizing efficiency in pursuit of growth. Yet over time, inequality has become a major social issue in the early 2000s as capital owners were able to accumulate wealth much faster than the general working class. In 2021, China’s Gini coefficient for income, a measure of inequality, was 0.47, lower than that of the US (0.49) but high by global standards. The annual income of the bottom 10 percent was only 2 percent that of the top 10 percent. The income disparity is more severe in Hong Kong. Official statistics suggested that in 1997, the household income of the top 10 percent was about 17 times that of the bottom 10 percent; by 2021 the number had risen to 40.
Policymakers have vowed to balance efficiency and fairness. As China passed the threshold of $10,000 GDP per head in 2019 and eliminated absolute poverty in 2021, achieving common prosperity has become a new policy priority.
China has increasingly put the focus on improving security, in response to the threat of the US, which may run the risk of aggravating inequality. The decoupling in the high-tech sector between China and the US has pushed for more investments in strengthening the supply chain and improving innovation capacity. However, such a policy focus means a more capital-intensive approach in industrial policies. Upgrading the value chain will see faster replacement of workers by industrial robots, automation and artificial intelligence, which will drive wealth to be concentrated more toward the top earners. Much of the low-end production have moved to regions that look like China in the 1980s, such as Vietnam and Bangladesh. To improve the income prospects for low-income groups in China, labor-intensive manufacturing and services sectors are still the key.
China has made significant progress in the past few years tackling inequality through better provision of a social safety net. Healthcare reform has progressed quickly, with a higher proportion of expenses being reimbursed and allowing cross-region settlements. It used to be a big headache for those elderly living with their children in the cities to use medical insurance from their hometown for treatment in the cities. Serious diseases have been a major cause of poverty for low-income families, particularly in rural areas. Yet with wider coverage of those diseases, people suffering from heart issues or diabetes can get more-affordable treatment. At the 20th National Congress of the Communist Party of China, the top leadership vowed to improve earning capabilities of the poor and strengthen social services. The Chinese path to modernization goes beyond just smart manufacturing or innovation. The pursuit of equality will remain a top priority in this transition.
The author is the chief economist of Hang Seng Bank China.
The views do not necessarily reflect those of China Daily.