Will the legacy of COVID be an economically more unequal world?

 

The world since 1987 has become remarkably less unequal than it was. This is because of sustained growth in areas which had traditionally been rich in human history but which two hundred years of Imperial inequality had destabilised, such as South America, the Middle East, India, and East Asia. In those countries and areas, incomes have generally risen along with GDP/GNI, wages have increased, land value increases have provided one-off but huge benefits to many who were formerly peasants, and living standards have increased (at the temporary expense of the environment.)

By contrast, Western countries have seen the opposite since 1973; their real wages and purchasing power have declined, their domination of world markets in a growing number of sectors and services has come under challenge, their national debts (since 2000) have generally grown, and their economies and supply chains have become globalised and financialised. This has not resulted in more unemployment, but has forced individuals to retrain, develop new skills, to become much more mobile, and to accept more loans, higher prices, and changes in home and car ownership, travel, and educational life chances.

Covid has emphasised just how contingent and complicated this convergence was. Over the course of globalisation from 1987-2010, form instance, supply chains were extended across the globe and based on the idea of mass purchases on credit in rich areas of goods produced at low cost in developing areas. Resource providers in Africa, South America and (unusually) Australia, became rich, but this tended to concentrate more and more ownership in those countries or regions and to come with environmental consequences.

Covid disrupted those supply chains, which were already being challenged by the China-US tariff conflict and by what one could call a Chinese ‘inflexion.’ This inflexion occurred because at some point between 2008 and 2015, China started to require more of its production to provide for its own infrastructure and population, and to be spread from its core areas, than to be exported. China did not wholly cease to be a low-cost producer, but it became a consumer, began to spend its accumulated savings and profits buying up assets, energy, and food elsewhere, and allowed its costs to rise. This left western companies in particular very vulnerable; they had bet on China, East Asia, Taiwan, and Russia providing resources and goods like, for instance, semiconductor chips, or grain, very easily and had shut down or limited western capacity.

Western companies did not anticipate that covid would not reduce demand and cut their orders to these supply chains; when they returned to raise orders, they found that Chinese, East Asian, Russian, or Indian entities had taken up the goods, and that they were shut out. This means that covid will be followed by cost-push inflation in the west, alongside monetary inflation from Qe, low interest rates, and ‘pent up demand’—meaning growth for non-western areas and inflation, or possibly stagflation in the West.

This will not have the global condition of increasing inequality; in fact, it will reduce it, because the west will become slightly poorer and the rest of the world slightly richer. If there is a dollar crisis as trade turns regional, and countries need fewer dollars to trade internationally, this will worsen the impact of the US debt because others will not buy US bonds. Thought the US might be forced into addressing its behaviour, and the British financial industry might become less valuable than manufacturing and the current account again, in the long run, this will mean a lower western standard of living in the short run.

If covid overwhelmed the healthcare systems in developing countries, or massively reduced populations (as it still might), then the west would show greater resilience and there would obviously be an increase in inequality, as well as a loss of global ‘equity.’ Covid so far seems not to have resulted in such widespread deaths that it can be said to be worse than a really bad year of excess deaths from flu, and the impact in China, Eurasia, and many big Indian cities seems to have been contained, albeit at high levels for those cities. The global development of vaccines might further blunt the impact of covid.

War, famine caused by animal deaths or climate change, and technological accidents threaten the developing world more than covid. The West is in a cyclical decline which has reduced inequality. Covid has accelerated this, and should therefore lead to more, not less, inequality globally. This will also allow the continuing growth of African and Eurasian societies, as they can take advantage of new technologies without having to transition from old ones, and have resources to sell which, in particular, a resource-poor China needs to buy.