From bipolarisation to bifurcation

Nobel Laureate economist Joseph Stiglitz sings a very different tune from the “Queen of Pop”. “Covid-19 has not been an equal-opportunity virus: it goes after people in poor health and those whose daily lives expose them to greater contact with others. And this means it goes disproportionately after the poor, especially in poor countries and in advanced economies like the United States where access to healthcare is not guaranteed,” writes the Columbia University professor in the International Monetary Fund’s (IMF) Finance and Development magazine.

Towards the end of 2019, markets and economies were worried over the bipolarisation of the world as the trade war between the US and China heats up. In just one year, no thanks to the pandemic, this new worry of bifurcation — a widening gap between the haves and have-nots — is adding to the litany of problems the global community faces.

According to Insead economics professor Mark Stabile, the less welloff are more likely to contract the virus. Low-income individuals are less able to work remotely, more likely to work in essential services, and also more likely to have pre-existing conditions like diabetes and hypertension that could see a higher likelihood of infection.

Moreover, Stabile adds, the likelihood of unemployment stemming from Covid-19 increases exponentially for individuals outside the top 1% of earners as of April 2020. “Gig economy workers” are also likely to be affected more significantly as they are usually less protected by government schemes; Singapore, though, has introduced new initiatives such as paying gig workers $7.50 an hour for attending select retraining courses.

The severity of the Covid-19 recession — the worst since the Great Depression — has naturally led to concerns about the long-term impact it could have on global inequality. While there is admittedly little correlation between financial crises and income inequality between 1973 and 2006, things have changed subsequently. Following the Global Financial Crisis in 2008, income and wealth inequality has grown in advanced economies like the US, as the middle class lost wealth and wages stagnated for young minority men with less education. The far bigger recession of 2020 could make these pre-existing trends worse.

The price of recovery

To save the global financial system, the US Federal Reserve led major central banks around the world to embark on their own variants of quantitative easing (QE), in a bid to stimulate their economies. This involves central banks buying short-term government bonds to lower short-term interest rates further than under conventional monetary policy, where rates are cut by reducing the money supply. During Covid-19, the Fed has gone further by pursuing “QE infinity”, where it will spend whatever it takes to maintain near-zero rates until 2023 instead of spending a fixed amount of money on QE.

These desperate measures have so far been successful in ensuring banks continue their lending during desperate times, heading off a global credit crunch. The ample liquidity succeeded not only in protecting the stock markets from collapsing, “Wall Street” is in an exuberant mood instead as US markets reach record highs. Yet, large swathes of “Main Street” remain on the figurative, and literal, life support.

One consequence of the largesse of central banks, says DBS chief economist Taimur Baig, is that the rich get richer, as their assets appreciate in value. The less well-off, without the capital to begin with, falls further behind. When QE was deployed in 2007-2008, says Stiglitz in his landmark book The Price of Inequality, the resulting liquidity saw stockmarket prices artificially boosted, which benefitted the wealthy disproportionately since they are more invested in equities. But most people saw little of this growth, however, since they owned less equities and were more invested in fixed-income government bonds, which saw a loss in value in most of the world vis-a-vis equities.

There are troubling signs that history is repeating itself. The UBS/PwC 2020 Billionaires Insights report noted that after initial losses, July 2020 saw billionaire wealth reaching a new high of US$10.2 trillion ($13.8 trillion) following a “V-shaped” rebound in asset prices following the rate cuts. Credit Suisse found minimal reduction (-122) in the global number of ultra-high net-worth adults in the first half of 2020 despite the shaky economic fundamentals. Asia Pacific billionaires, in particular, saw their wealth rebound by 36% from 2019 to US$3.3 trillion this year as the region recovered swiftly from Covid-19, with tech and healthcare billionaires leading the pack.

While more fiscal stimulus is now being targeted at consumers rather than large banks vis-a-vis the Global Financial Crisis, lower-income individuals are still disproportionately impacted financially. Generally owning less assets and relying more on income for wealth, they have become less well-off due to unemployment arising from the recession. “The Covid19 pandemic is a highly regressive event which could potentially widen the income gap in Singapore. Its impact ... skew[s] unfavourably towards lower-income earners,” said a DBS report in August. Yet Credit Suisse maintains that there is “no firm evidence that the pandemic has systematically favoured higher-wealth over lower-wealth groups or vice versa”.

Worse, the brunt of Covid-19 has fallen disproportionately on vulnerable groups such as women, young people and minorities. Credit Suisse finds that women have been hurt by high exposure to the travel, personal service and retail industries, while “visible minorities” in the US have seen higher infection rates and job losses. Srividya Jandhyala, associate professor at Essec Business School’s management department, also points out that more women have been dropping out of the workforce than men. Asset-poor millennials are also struggling to get on the wealth ladder, having lived through two damaging financial crises in their early lives, with many delaying major life milestones such as getting married or buying a property.

Michael Switow, founder of local anti-poverty NGO ONE (SINGAPORE), tells The Edge Singapore that there has been a sharp spike in the number of aid applicants for the organisation’s ONE emergency fund, which provides financial and in-kind aid to low-income individuals and families in Singapore. According to him, approximately 80% of the aid applicants are women — particularly older women and younger single mothers. Many mothers — particularly young, often single, mothers — struggle to provide formula milk and diapers for their infants.

And this is not to mention the unique plight of Singapore’s large migrant worker population, which was the community worst-affected by Covid19. Housed in unsuitable living conditions, infection rates soared rapidly within foreign worker dormitories, with infections reaching 54,485 as of October. Peak daily infection rates in the dormitories reached 1,369 in April.

Rebecca Malay of the Philippines Rural Reconstruction Movement says that the economic livelihoods of rural folk have been hurt by their inability to bring produce to market in metro Manila where they command higher prices. Women and girls have faced increased incidents of trafficking and domestic abuse since the pandemic, with some poor families resorting to having children performing lewd acts online for money. While some businesses have actively helped with relief efforts before the government can act, others have used Covid-19 as a pretext to circumvent regulations such as government procurement laws.

“Some people have the ability to ride this out — they have resources, capabilities or reserves they can draw on to ride out some of these pandemicinduced constraints, while others simply do not,” warns Jandhyala. For low-wage workers, minorities and small businesses — especially those in the developing world — the scars of Covid-19 will linger long after a vaccine arrives.

Challenges in the emerging world

Covid-19-induced inequality is likely to be felt most greatly in emerging markets (EMs). On the one hand, say Alexis Crow, global head, geopolitical investing, at PwC, and Samir Saran, president of the Observer Research Foundation (ORF), in a World Economic Forum (WEF) thought piece, Covid-19 saw significant disruption to the growth models of EMs, with the pandemic weakening commodity prices, tourism demand, and remittances that such economies rely on for growth. The limited ability of lower-income workers in EMs — many of whom work in the informal sector — to work from home and their vulnerability to unemployment will see them bear the brunt of Covid-19’s economic impact, add IMF economists Gabriela Cugat and Futoshi Narita.

In developed markets (DMs), governments can use fiscal policy to support workers — think Singapore’s Jobs Support Scheme and Covid-19 budgets. But with far smaller coffers than DM peers, cash-strapped EMs are currently struggling with tight finances despite their Covid-19 response to date being just one-fifth that of DMs. Worse, not only do EMs face difficulties in accessing credit vis-a-vis more creditworthy DMs, sovereign borrowing costs have risen due to Covid-19-induced outflows and depreciation of local currencies, blocking access to extra funds.

“Global extreme poverty is expected to rise in 2020 for the first time in over 20 years as the disruption of the Covid-19 pandemic compounds the forces of conflict and climate change, which were already slowing poverty reduction progress,” warned the World Bank in an October press release. It sees the pandemic pushing an additional 88 million to 115 million people into extreme poverty in 2020, rising to as many as 150 million by 2021, depending on the severity of the recession. World Bank group president David Malpass sees over 1.4% of the global population potentially falling into extreme poverty, turning an economic crisis into a humanitarian one.

While the gap between DMs and EMs means that the tribulations of the latter are often far from the minds of wealthy DM residents, the loss of EMs could put a dent on global growth. With advanced DM economies having reached the limit of their growth potential, the global economy relies on the rapid growth of EMs to pick up the slack. If EMs find themselves unable to reignite economic growth in their countries or worse, mired in a financial crisis, DMs might find their own economic growth severely hampered as well.

Singapore’s Senior Minister (SM) Tharman Shanmugaratnam argued at DBS Asia Insight Forum 2020 that a strong multilateral response is needed from the international organisations like the IMF and World Bank to rescue EMs. He laments, however, the weak multilateral response to the crisis due to global geopolitical tensions, adding also that the IMF allocates more money to DMs even though EMs need it more. With DMs struggling to contain the virus too, says Jandhyala of Essec, it is politically difficult for the developed world to persuade their electorates to support financial aid to EMs.

EMs could also find it more difficult to access the vaccines, slowing down the normalisation of their economies. The Duke Global Health Innovation Center finds that developed countries have already purchased 3.8 billion doses, with options for another five billion. Covax, a global initiative dedicated to promoting equal access to the vaccine, estimates that it would require “at least 1.14 billion doses of a single-dose vaccine, and twice that amount for a two-dose regimen” to vaccinate at least 20% of member countries — so far, it has only enough for 250 million people.

Lingering scars

While a viable vaccine has been held up as the key to ending the pandemic, Covid-19’s effects on inequality could resonate long after lockdowns are lifted for good. Perversely, much of this is due to the acceleration of digital transformation in the wake of lockdowns, with many business leaders such as Microsoft CEO Satya Nadella describing it as “two years’ worth of digital transformation in two months”. Considering that digitalisation is likely to exacerbate existing structural unemployment, inequality could grow as many workers find themselves rendered obsolete.

“Now it is more likely that both the private and the public sectors will take the risks [of economic disruption] to heart. And that means certain activities, certain goods and services, and certain production processes will be viewed as riskier and costlier. While robots do get viruses, they are more easily managed. So it is likely that robots will, where possible, at least at the margin, replace humans,” warns Stiglitz in Finance and Development. He sees automation replacing low-skilled, personto-person service jobs as transactions migrate online due to safe distancing.

While Stabile of Insead notes that the shift to automation and tech had begun long before the pandemic struck, Covid19 appears to have accelerated the process. The UK Office for Budget Responsibility expects structural unemployment to contribute to an unemployment rate of 12% by late-2020 — or around four million individuals — a rate similar to the 1980s when rapid de-industrialisation took place amid massive fights with the unions. Nichol Ng, president of ONE (SINGAPORE), sees lower-middle class workers as most vulnerable to these structural changes, arguing that many could fall into the ranks of the poor in the process.

Fresh graduates entering the job market now could face significant challenges in the long term. According to Essec’s Jandhyala, learning a new job is very much also done by osmosis through “water-cooler conversations” with colleagues and constant interactions that also double up as networking opportunities, something that is impossible to enjoy under remote working. DBS’ Baig says that workers who miss out on jobs for several years during Covid19 could see a permanent decline in lifetime earnings and wealth.

These young workers will also likely have to contend with a long-term depression of wages. “The way the labour market works is that as you progress through your careers, it’s often the case that your wages are pegged to what you were previously making,” remarks Jandhyala, though Stabile of Insead notes that this is still better than having no work at all. Yet, Jandhyala thinks that this trend could be mitigated if employers are mandated not to ask potential hires about their previous wages, weakening the impact of past earnings on present salaries.

More damaging, however, is the trauma of this period of disruption inculcating a sense of risk aversion in the psyche of fresh graduates. What happens early in one’s career, notes the Essec management professor, can often affect how one handles risk in one’s future career. “If finding and keeping a job is hard in one’s early career, one might be much less willing to take risks in the future,” she warns. This is an attitude that could limit the ability of the Covid-19 generation to seize far-out opportunities or try risky ideas going forward.

Covid-19 is likely to disproportionately hurt the career prospects of women too. “Women are likely to experience long-term setbacks in workforce participation and income. Impact on pensions and savings will have implications for women’s economic security far down the road,” argues UN Women, which notes that 40% of all employed women — 510 million women globally — work in sectors hit hard by Covid-19 such as retail or hospitality compared to 36.6% of men. With 11 million girls expected to leave school by the end of Covid-19 — many for good — a generation of women could face weaker career opportunities in the aftermath of the pandemic.

Similar economic marginalisation following the Global Financial Crisis was partly responsible for the rise of populist leaders like Donald Trump, who rallied angry voters against globalisation, trade and immigration. While populist politicians have been discredited by their poor handling of the pandemic, the disproportionate financial gains by the wealthy and growing numbers of economically marginalised workers could reignite populist feelings, with anti-Asian sentiment rising in Covid19’s wake. Aberdeen Standard sees populism as a constraint on growth, a threat to economic transparency and a source of political volatility.

Building social cohesion

Naturally, there are no easy answers to resolving global inequality, with policymakers worldwide struggling for answers even before Covid-19. But it is clear that the main challenges for policymakers will be to improve access to essential services for low-income individuals in the short term, and ensure that the labour force is ready to deal with job disruption arising from post-pandemic digitalisation in the long run. This may require the slaying of some sacred cows in the name of strengthening social cohesion.

“We have to avoid thinking about economic objectives as somehow separate from social objectives,” Tharman said at the Singapore Tech Forum 2020, noting that both dimensions reinforce or inflict damage on one another. “If you think of the economy as a social ecosystem, not just a business ecosystem, you are able to create opportunities starting upstream with education but moving into work ... with a sense of equality of opportunity,” he adds. Ultimately, it is about giving the people a stake in the economic well-being of the country, creating the social cohesion needed to sustain a competitive economy in the long run and create a better society.

At a basic level, Ng sees the need for the strengthening of Singapore’s social safety net and the provision of decent work through provision of a “living wage” to Singapore workers — which she defines as having sufficient income to live with dignity. She was encouraged to see the Singapore government roll out significant support measures to help the low income during the pandemic. She hopes that going forward, the government will increase workfare payouts — which she sees as too small — and introduce redundancy insurance for the unemployed, which she believes will help ameliorate poverty and the income gap in Singapore in the long run.

Stabile also thinks that policymakers will have to introduce more spare capacity into healthcare systems to improve resilience in times of crisis. Previously, many healthcare systems, he says, tended to cut spare capacity and stockpiles to a minimum in order to cut costs, resulting in them being caught offside when Covid-19 reared its ugly head. With countries with more spare capacity (for example, Germany) typically performing better than those without (for example, UK), it seems that policymakers will be looking to build up stockpiles against another public health crisis.

Naturally, all of this will cost money, with the Insead economist calling for higher progressive taxation on the wealthiest in society to fund such changes, as well as the significant cost of fighting and recovering from Covid19. Sadly, he does not see most governments having the political will to implement such policies going forward. Ironically, however, he believes that businesses — which low public spending is meant to benefit — would not be adverse to paying higher costs to solve social problems if such policies are implemented fairly and in a manner that provides them with certainty, without giving competitors a leg-up.

One thing Stabile encourages businesses to do is to keep jobs going and avoid retrenchment exercises during the Covid-19 period. Such a move, he argues, is in the interest of firms, as they will likely have to spend time and money replacing these laid-off workers after the pandemic if they are too trigger-happy with existing staff. This also means being more flexible with workers in terms of remote working arrangements, a policy that in the long run could improve labour productivity as well as activate more women in the workforce. Businesses should also look to better compensate essential workers to a level commensurate with their contribution to society.

Reimagining the economy

In the long term, however, it is reskilling workers that will be key to keeping them employed amid the quickened pace of digital transformation. “When we talk of the jobs of the future, therefore, it is not some far-off or hypothetical possibility. The future begins now,” said Tharman in the fifth of six national ministerial broadcasts on Singapore’s post-Covid-19 future. Besides using traineeships to give fresh graduates a headstart in developing industry-ready skills, Singapore is expanding training opportunities in every sector and job through the Next Bound of SkillsFuture, which looks to further expand Singapore’s national retraining programme.

But while skills upgrading has its definite merits, Essec’s Jandhyala warns that a significant pitfall is skills possibly becoming redundant by end of training, as life cycles for technology products have become ever shorter. It is also hard to determine what the skills of the future will be, she tells The Edge Singapore.

Switow also remarks that there are often barriers to reskilling for low-income earners who have to support themselves — often with more than one low-paying job — or take care of children. Many lower-income individuals may also face limited access to technology needed to retrain workers in this difficult time — especially among the older generation who are less familiar with such technologies — requiring additional support to keep them in training.

And the government has rolled out such support, with the SG United Skills Programme offering trainees a $1,200 per month allowance to cover retraining from July 2020 for the duration of their programme. “We are determined that there will be no ‘lost generation’ in Singapore as a result of Covid-19. The Labour Movement, our companies and the Government will walk with you on this journey. We can overcome this difficult phase together,” said Singapore’s Deputy Prime Minister Heng Swee Keat at the Young NTUC LIT DISCOvery Virtual Symposium in June.

But more fundamentally, perhaps the key to resolving inequality is to reimagine the future of capitalism. “We need a new capitalism — a more fair, a more just and a more equitable capitalism,” proclaims Marc Benioff, founder, chairman and CEO of Salesforce at the Singapore Tech Forum 2020; Salesforce fought for additional taxes on big business in San Francisco to tackle homelessness. Instead of endlessly pursuing profits, he suggests, it is perhaps time for the economy to reorient towards building a more inclusive society by realising the UN sustainable development goals. The business of business, it seems, is to create an equitable society too.