IMF Managing Director

High inequality to trigger social unrest

The Covid-19 crisis could pose a threat to the social fabric in many countries, IMF warns

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The economic  shock caused by the Covid-19 crisis could lead to polarisation, erosion of trust in government and social unrest, the International Monetary Fund warned on Thursday (April 1) and this is no April Fools’ Day joke.

“These factors complicate sound economic policy making and pose risks to macroeconomic stability and the functioning of society,” the Washington-based fund said in a report released ahead of
next week’s virtual IMF-World Bank Spring Meetings.

“Covid-19 has exposed and exacerbated preexisting inequalities in incomes and access to basic public services” the report said.

Indeed, income inequality has worsened over the past three decades, both in advanced and emerging-market economies.

Poorest households have been hit particularly hard, and the damage to education could last for years, according to the report. Meanwhile, increasing reliance on digital work makes it harder for low-skilled workers to find jobs and could lead to higher rates of long-term unemployment.

Authors David Amaglobeli, Vitor Gaspar, and Paolo Mauro in a blog post called for governments to “give everyone a fair shot at prosperity.”

They also suggested countries could increase taxing wealthy households and modernize corporate income taxation.

“Up to six million children in emerging market and developing economies could drop out of school in 2021, with lifelong adverse consequences. If governments increased spending on education by one percent of GDP, for example, they could reduce the gap in enrollment rates between the richest and the poorest families by almost one-third,” the authors said.

“Further, low-income countries will need support from the international community to help with financing and implementing home-grown taxation and spending reforms” the authors added.

More than 100 countries have approached the Washington-based global lender about receiving help since the Covid-19 led to the biggest contraction of the world economy since the 1930s. A package of loans worth $500bn, mostly for poorer countries, is due to be announced next week.

Last year, ninety five million people entered extreme poverty.

“The pandemic has confirmed the merits of equal access to basic services – healthcare, quality education, and digital infrastructure – and of inclusive labour markets and effective social safety nets. Better performance in these areas has enhanced resilience to the pandemic and is key for the economic recovery to benefit all and to strengthen trust in government,” the report said.

“If governments are unable to meet the challenge, the erosion of trust could lead to more polarised politics in which some call for a smaller government, while those affected by illness or job loss would urge for more government services.”

Social Unrest and Pandemics IMF chart

(Social unrest rises significantly after pandemics: percentage change in risks of social unrest)

More than a year into the COVID-19 crisis, signs of a recovery for some countries are slowly beginning to emerge. But in her customary curtain-raiser speech ahead of next week’s meetings, IMF Managing Director Kristalina Georgieva said high uncertainty is one of the greatest dangers facing the world economy.

She revealed the IMF expects a “multi-speed” recovery because economic fortunes are diverging.  “Too many people continue to face job losses and rising poverty. Too many countries are falling behind” she told  the Council on Foreign Relations  on Tuesday (March 30).

In the months and years following previous major pandemics, the countries most affected saw a rise in social unrest. Higher social unrest, in turn, is associated with lower growth, which worsens inequality, forming a vicious cycle. Based on this historical trend, the Covid-19 could pose a threat to the social fabric in many countries, Tahsin Saadi Sedik and Rui Xu economists at the IMF’s Asia and Pacific Department wrote in December 2020.

Tensions are already becoming evident. Numerous anti-lockdown protests are taking place in many parts of the world as people lose jobs and government measures are seen as insufficient or unfairly favoring the wealthy. The income gap between the richest and poorest has only worsened.