Covid-19’s impact on income inequality

By Afshan Subohi

Published in Dawn, The Business and Finance Weekly, February 8th, 2021

Pakistan has proven to be unique. She managed to escape the catastrophe and succeeded in orchestrating the economic recovery quicker and at a pace faster than others despite all odds. A closer look, however, unveils some disturbing facts that bring into questions the sustainability and fairness of the recovery process.

Currently, it seems the coronavirus infection and morbidity are as common in the rich as they are in the poor unlike elsewhere. The impact of quarantine restrictions imparted disproportionate hardships on the vulnerable sections. The ruling PTI team’s revival plan, however, ignores most affected people and focuses narrowly on needs and aspirations of the elite.

Of almost Rs3 trillion worth of relief — Rs1.2tr monetary and Rs1.8tr fiscal breaks — barely 6.6 per cent or Rs200 billion was spent in direct cash transfers to the poorest during the lockdown to shield them from hunger. The rest (93.4pc) is directed to support private businesses without tying concessions to job creation, fairer pay scales and revenue generation.

It is a riddle as to what exactly saved Pakistan from the fate that befell many others in the pandemic. In most countries, including the United States, United Kingdom, Germany, India, Brazil and Indonesia, infections and deaths were more rampant in the vulnerable communities. In Pakistan it was not so. The data is lacking but anecdotal evidence suggests more infections and deaths in the middle and upper classes in Pakistan.

Multiple studies show the pandemic-related restrictions created greater hardships for daily-wage and contractual labour

A young economist barred by her employer from going public expressed reservations. “I don’t see why the virus would spare the poor in Pakistan. We lack credible data. When did we conduct mass testing to profile the social class of people who contracted the virus or died of it?”

On second thoughts, she said: “We know Covid-19 is more lethal for old people. Maybe the poor in Pakistan die early so their ratio is low in this segment and thus fewer deaths.”

“The Covid-19 shock was not classist. It impacted everyone. The recovery is uneven. It reflects the flawed framework and the elitist policies of the government in Pakistan,” commented an economist.

Multiple studies, including the brochure of the key findings of the Covid-19 impact circulated by the Planning Commission of Pakistan, suggest that the Covid-19–induced restrictions imparted disproportionate hardships on daily-wage earners and contractual labour, with income and job losses indelibly tied to the lockdown.

Asad Umar, federal minister for planning, was approached as officers in key positions in his ministry told Dawn that they have been explicitly asked not to share views and information with the media. Mr Umar’s response on the state of income disparity did not arrive till the filing of the report.

Zafar ul Hassan, chief spokesperson for the Ministry of Planning, responded thus: “Inequality is a by-product of economic development. Covid-19 has impacted livelihoods and economic activity. Rural areas, non-farm sector are impacted the most. Given the anecdotal evidence, inequality seems to have increased, which the government tried to compensate through broadening the coverage of the social sector.

“The recovery phase recently started is likely to narrow the gap between the rich and the poor by creating opportunities in pro-poor sectors. The construction sector has traditionally worked as narrowing the inequality gap. Poverty and inequality are causes of concern the world over as the fallout of Covid-19. However, Pakistan is likely to be less impacted.”

He mentioned the soft loan plan designed to support the wage bill for companies that promised to retain employees during the lockdown and insisted on the noble intent of the government without citing evidence of the relief for common people in the bailout package to make the recovery inclusive.

A leading academic who declined to lend his name to the analysis done in haste to comment on the trend of income disparity over the past one year messaged: “If we analyse the income shock during the lockdown by asset quintiles (five asset classes) using PBS data, it seems that the bottom three quintiles (i.e. bottom, lower middle and middle) experienced a much larger shock.

“And the post-lockdown recovery has been least complete in these categories. If these results hold up in a careful analysis, it will suggest that inequality has increased. One big reason for the harsher shock in the bottom three quintiles is the loss of jobs. It was, therefore, important that any bailout to employers was explicitly tied to job protection.”

Earlier, discussing the possibility of income disparity narrowing despite an increase in poverty during the pandemic, he did not rule it out: “Poverty and inequality may not move in the same direction in the current context because the poor weren’t the only ones to experience the income shock. The lower middle and middle classes experienced a large shock too. But it is yet to be seen whether the recovery has been less robust in these classes than the poor. That would shore up the upper end of the distribution. But it doesn’t help us figure out which other part of the distribution didn’t get shored up.”

Dr Shamshad Akhtar, former governor of the central bank and chairperson of Karandaaz Pakistan, was reluctant to comment. “I don’t have empirical evidence to base conclusions on but if people lost jobs at the lower end and the self-employed lost income opportunities then the share of low-income group must have gone down. It’s difficult to reverse the rising poverty of this nature.

“With corporate business and retail bouncing back, the higher income strata have benefited. Many analysts are arguing Covid-19 has worsened inequality and added 100 to 150 million more to the ranks of the poor. The government has expanded the Ehsaas programme and is focused on growth revival but delays in real reforms can derail progress.”

Dr Rashid Amjad, former vice chancellor of the Pakistan Institute of Development Economist, said: “Poverty increased significantly mainly in urban areas during the early few months of Covid-19 as the lockdown was enforced resulting in rising open unemployment. The new middle class was also badly affected in this period.

“However, the government by timely relaxing and then replacing the lockdown with targeted area shutdowns and backing it up with significant direct income support for the poorest through the Ehsaas programme eased the situation though the overall income loss was felt by most of the population in urban areas. I, therefore, do not agree with the large body of researchers (and journalists) who project a massive rise in poverty and that it will take years to bring it down to earlier levels.

“Inequality rose, in all probability, as some income groups maintained their incomes and a few made high profits, including on the stock market (mainly those who bought stocks during the crash in March-April 2020). They included sellers of essential goods, especially food grains, textile exporters, IT companies, cement and related construction material.

Even if the increase in inequality is marginal, it’s overall rising trend in the last two decades needs the highest attention and action by the government. Collecting evaded taxes is turning out to be a slow process as is curbing corruption and money laundering. Raising duties and sales tax on luxury goods could help but not much. Enforcing an agricultural income tax and GST on services could be a step in the right direction.”

 

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