Poverty and Distributional Impacts of COVID-19: A Study of Low-Income Households

The coronavirus has often been referred to as an “equalizer,” sickening both the rich and the poor, but is it really affecting people equally? As the socio-economic consequences of the outbreak become apparent, economists and policymakers are more concerned about the distributional impacts of the coronavirus. Students from low-income regions may not have access to the same level of online education as others do; informally employed migrant workers may no longer be able to send money back home; and many countries with scarce resources are facing serious disruptions in the supply chains of essential food and materials. This article will walk you through some of the impacts of the coronavirus epidemic, and explain why it disproportionately affects low-income households.

As the COVID-19 outbreak continues to evolve, it is now clear that its social and economic impacts, stemming from the direct and indirect effects of the illness, remain a work in progress. Ever since the epidemic started, many countries and regions have repeatedly downgraded their GDP projections, a trend that will likely continue as the ultimate scale of the outbreak remains unknown. At the epidemic’s initial stage, government policies were centered around containing the spread of the virus with stringent transmission control measures, sometimes at great economic costs. As the epidemic evolves, however, it becomes transparent that the long-term socio-economic effects of the outbreak will surely surpass any previous predictions, should governments not intervene with a broader set of economic policies.

Among all those affected by the outbreak, some are more susceptible to its effects than others. Indeed, the social and economic impacts of COVID-19 vary across income groups, and low-income households are among the most vulnerable people. This study aims to explore the channels through which the socio-economic effects of COVID-19, coupled with the uneven global distribution of wealth, influence the welfare, or even survival, of low-income households in some of the world’s most under-developed countries and regions.

Disruption of education services

Schools in more than 100 countries remain closed at this moment due to strict quarantine and social distancing measures, threatening to reverse decades of progress on global education. Disruption of the school system can be a major concern for middle- and low-income countries unable to provide students with quality online education, since it widens the existing educational gap between developed and under-developed nations.

Though some countries like China, Japan, Australia, and Vietnam have recently announced plans to re-open schools for physical classes, schools in the majority of the world remain closed. In particular, elementary schools in low-income regions are among the most heavily affected. Worldwide, schools in 51% of the countries and regions are not scheduled to open in the foreseeable future, covering a total of 1.07 billion students, or roughly 60% of the entire student population.

School systems in low-income countries are more susceptible to the threat posed by COVID-19. Scarcity of educational resources means students often have to cramp in small classrooms, not nearly ideal for the social distancing required to contain the spread of the virus. Furthermore, medical and managerial resources are spread out thin in these places, meaning preventative measures cannot be effectively taken to prepare schools for the safe return of students.

The widespread closure of schools has incurred significant consequences on public education in low-income countries. Not only do students lose the opportunity to learn in class, but they also miss the nutritious free meals provided by their school, as well as a safe place to study while their parents are out working. Additionally, girls are found to be disproportionately affected by the outcomes of school closures. The Campaign for Female Education (CAMFED) recently found that some girls in the developing world are prioritizing marriage and children over education under the current circumstances, either by choice or out of pressure from family.

Prolonged school closures could also negatively impact a country’s economy in the long run. For many students who chose to work during the quarantine period, they may never return to school again. School dropouts due to the suspension of class are especially common in low-income regions, where households cannot afford to feed their children without the school’s free meal plans, or are unable to tend to them during the day. Instead, school children are typically sent to work once school suspends for a long period of time, which may translate into lower long-term income trajectories for them and their families if they do not return to class. According to a World Bank estimate, 5 months of school closure will translate into a $10 billion loss of the aggregate lifetime earnings of all active students. If a large sum of students fail to return after school re-opens, the nation will suffer from reduced overall human capital for the future of its economy, which is the aggregate economic value of workers’ education and skills.

Inequality of education worldwide is also visible in online learning. According to Nikkei, while 91% of advanced economies have implemented online education of some sort to replace on-site learning, only 54% of low-income nations can enjoy the benefits of studying online. Despite the lack of monetary resources, developing countries are seeking new ways to reach their school children. For instance, teachers in Bangladesh and Mozambique are producing educational programs on television as well as the radio. India, meanwhile, are utilizing education apps on smartphones to keep their students busy, although not all school children have access to smartphones or the internet.

Impact on informal economy workers

An informal economy, or informal sector, is the part of an economy that is not regulated by the government. Though not monitored, the informal sector makes up a large portion of the economies in mid- and low-income countries. The International Labor Organization (ILO) estimates that over 2 billion workers are earning their livelihoods in the informal economy in 2020, representing about 62% of all the people working worldwide. In some low-income countries, for every 10 people employed, 9 are employed in the informal sector. These workers usually perform low-skilled tasks for unregistered small-scale businesses in precarious work conditions. Not regulated by the government, informal workers are often excluded from social security benefits such as medical insurance or coronavirus-related financial assistance.

Informal economies are often built around construction, hospitality, tourism, and retail industries, which are among the most heavily affected by the lockdown. Having no savings or assets to fall back on, a loss of income, however temporary, can lead to devastating consequences for informal workers, not to mention instances where lockdowns had led to permanent job losses. For example, local governments in India are using the lockdown to demolish street vending infrastructures, which forces people to close their informal businesses for good, leading to a surge in poverty.

For informal workers, the risk posed by COVID-19 only exacerbates the main vulnerabilities of their previous conditions. Overcrowded and unsanitary living environments render social distancing impractical, while the lack of running water limits their options to keep sanitized. For those who chose to work during quarantine, personal protective equipment (PPE) and hand-washing stations are rarely available to them. If ever they do become sick, no medical care and employment injury benefits are guaranteed, and even when medical services are available, many will incur out-of-pocket payments that force households to go into debt, and deeper into poverty.

Following the epidemic, many formal micro, small, and medium enterprises (MSMEs) are expected to face financial collapse or permanent closure, engendering an unprecedented surge in unemployment and underemployment (being employed in a job that does not fully utilize a person’s skills), according to the ILO. Absent any alternative source of income, many unemployed workers may resort to the informal sector, and owners of MSMEs may also opt to push their enterprises into informality.

The ILO estimates an increase of 5.3 million to 24.7 million in unemployment in 2020 because of the current crisis. The consequent restructuring of production activities could incur long-lasting effects on the economy, leading to increased frictional unemployment (unemployment due to normal turnovers in the labor market) or further expansion of the informal sector.

Loss of remittances, the transfer of money from a migrant worker to their home country, is another serious concern for the families of informal workers. International remittances originating from migrant workers employed in advanced economies account for a large share of GDP in middle- and low-income countries like Nepal (25.4%), Ethiopia (7%), Guatemala (12%), Moldova (10%), Sri Lanka (8%), and Tunisia (5%). Since many of these migrant workers are indeed informal workers, a substantial shock to the informal sector could directly reduce income from remittances in these countries, increasing the likelihood of families falling deeper into poverty.

Actions must be taken to protect workers in the informal sector. So far, out of the 181 countries who have introduced social protection programs, 26 countries specifically targeted informal workers. The most common measures include cash handouts, food and necessity support, and employment services. In the Philippines, informal workers were offered paid public works in disinfection and sanitation services. In Indonesia, unemployed informal workers were given discounted skill-training courses. Furthermore, many informal family businesses in Mexico were provided $1,000 in loans to help them survive the current crisis.

Food shortages and supply chain disruptions

“The coronavirus has sometimes been called an equalizer because it has sickened both rich and poor, but when it comes to food, the commonality ends,” said Abdi Latif Dahir, the East Africa correspondent for The New York Times. “It is poor people, including large segments of poorer nations, who are now going hungry and facing the prospect of starving.”

Food consumption accounts for the largest share of household spending for most low-income households. In rural Mozambique, this number is over 60 percent, while for the poor and vulnerable in Indonesia, it reaches as high as 75 percent. As a result, any increase in food prices (or shortages) tends to disproportionately impact low-income households in developing nations. As worldwide lockdowns disrupt agricultural production and supply routes, millions in poverty are worried whether they will be able to secure enough food for their families.

In Nairobi, residents of its largest slum set off a stampede during a recent food give-away, as desperate residents fought for flour and cooking oil. Across Colombia, households are hanging red clothings from their windows, signalling that they are suffering from hunger. “Instead of coronavirus, the hunger will kill us,” said Nihal Singh, a migrant worker in India hoping to eat his first meal in days at a local soup kitchen.

To make matters worse, widespread supply chain disruptions leave poor nations and regions more vulnerable than ever, especially for those reliant on foreign food imports. According to Johan Swinnen, director of the International Food Policy Research Institute, while the system of food distribution and retailing in rich nations is organized and automated, similar systems in the developing world are labor intensive, making the supply chains much more susceptible to lockdowns and social distancing regulations.

In Nigeria, farmers had to watch their crops go to waste in the field, as food truck drivers are afraid for their safety, or that they will be fined by overzealous police, despite the fact that food truck drivers are meant to be exempt from lockdown restrictions. As supplies dry up, millions of people in the region are at risk of starvation, according to the United Nations and World Bank.

For countries that rely heavily on imported food, supply chain disruptions could bring even more devastating consequences. For instance, Kyrgyzstan is highly dependent on food imports from Kazakhstan and Russia. However, since its border to Kazakhstan is closed at the moment, Kyrgyz households are forced to remove many nutritious but expensive foods from their diet. To make matters worse, many suppliers in the region, such as Russia and India, have reduced or even banned the export of certain food items, to ensure their countries will have enough food to cope with the epidemic.

In order to mitigate the effects of rising food prices and potential food shortages, it is critical that authorities exempt agriculture practices and actors from lockdowns, while providing them with personal protective equipment to ensure safety at work. For example, the government in China has established many “vegetable basket” supply bases and opened up “green lanes” for the transport and distribution of agricultural products, ensuring the integrity of food supply chains. Furthermore, it is recommended that export restrictions be lifted to ensure free trade. If all nations avoid the further usage of disruptive policies such as food export bans, we can minimize the volatility of food prices in the international market and help stabilize the global food supply.

Concluding remarks

Instead of an equalizer, I would prefer to regard the coronavirus as a magnifying glass. It shows us just how fragile our system can be, and how little we have done to achieve wealth equality. Throughout the previous decades, we have progressed greatly towards eliminating widespread global poverty, but this epidemic has reminded us that the results of our hard work, if not nourished, could be reversed in no time. The coronavirus outbreak is an important lesson for us all, for its distributional effects on different income groups highlight the areas where we can improve on to achieve equality, and remind people how incredibly devastating poverty can be for people when facing calamities.

This article was written by Yihan Xu and Cinny Lin, currently based in Shanghai and Taipei. You can reach out to the authors at yx1708@nyu.edu / ycl461@nyu.edu.

Photo Credit: Sanchit Khanna/Hindustan Times via Getty Images

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