Asia — COVID-19 exacerbates inequality denting growth prospects

Asia’s labour market has deteriorated markedly following the COVID-19 pandemic and to a much greater extent than during the 2008-09 global financial crisis. While the crisis is affecting all sectors, job losses have been concentrated in high-contact and non-teleworkable industries that have a larger share of low-income workers, thereby worsening inequality. IMF researchers have found that major epidemics over the past two decades, though smaller in scale than the COVID-19 calamity, have led to persistent rises in inequality despite government efforts to redistribute incomes from the rich to poor. The increase in inequality tends to be larger for economies with higher robot density and adoption. Asia is the world’s largest industrial robot market; two out of three robots newly deployed in 2019 were installed in Asia (Chart). As such, the impact of COVID-19 on inequality in Asia could worsen in the medium term.

Higher inequality is associated with lower sustainable medium term growth and increased social unrest. Higher social unrest, in turn, is associated with lower economic activity in the short term and higher inequality, perpetuating the vicious cycle. The IMF finds that the effect of rising inequality on social unrest is stronger when income inequality is already high. In particular, this effect is pronounced when the net (post tax and transfer) Gini coefficient, a measure of income inequality, is above 40—about one-third of Asian economies exceed this threshold. An increase in inequality is also associated with more unrest when government transfers to redistribute income are low. Unfortunately, Asia’s redistributive policies are limited and frustrated by large informal sectors. As seen in some countries already, the COVID-19 pandemic is likely to increase inequality and trigger social unrest, thereby frustrating the global economic recovery.