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People are increasingly worried about inequalities but divided on how to address them

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Photo: Arno Senoner/Unsplash

For a recovery from the COVID-19 crisis that is strong, sustainable but also fair, it will be key to tackle inequalities and promote equal opportunities. Yet while there is growing consensus that inequality is a problem, people are increasingly divided about its extent and what to do about it, according to a new OECD report.

Does Inequality Matter? says that most people are concerned about inequality. Four in five people in the OECD feel income disparities are too large in their country. People care about inequality of both outcomes and opportunities, as they perceive high income and earnings disparities as well as low social mobility. Moreover, concern over income and earnings disparities has risen in the last three decades, in line with the increase in income inequality.

People’s perceptions are not disconnected from reality. Along the lines of observed trends in income inequality, people believed, on average, that top earners earned 5 times as much as bottom earners in the late 1980s/early 1990s, while this perceived top-to-bottom earnings ratio has increased to 8 today, after having reached a peak of 10 during the Great Recession. Tolerance for inequality has also increased, though by less. Today people believe, on average, that top earners should earn 4 times as much as the bottom earners, up from 3 times in the late 1980s.

More than 6 out of 10 OECD citizens believe their government should do more to reduce income differences between rich and poor with taxes and transfers. The more people are concerned about inequality and perceive low social mobility, the higher their demand for redistribution.

However, beliefs about effectiveness of policies and determinants of inequalities matter. People are less likely to demand more redistribution if they believe that benefits are mistargeted, and they are less in favour of progressive taxation if they believe that corruption is widespread among public officials, prompting the misuse and misallocation of public benefits.

Demand for more progressive taxation is also lower where people believe that disparities are justified by differences in personal effort, rather than to circumstances beyond people’s control. For example, in 2018 in Poland 25% of people believe poverty is due to lack of effort rather than injustice or bad luck and 54% demand more progressive taxation, while in Germany that figure is 4% and 77%, respectively.

Yet, despite most people being concerned about inequality, they have strongly different beliefs about its extent and what to do about it. Within the average OECD country, one fourth of people thinks that more than 70% of the national income goes to the 10% richest households, contrary to another fourth who think that less than 30% goes to the richest households.

Furthermore, the large heterogeneity of people’s views on inequalities has grown in the last three decades, even among people with similar socio-economic characteristics. There is evidence of growing polarization: in most OECD countries there is an increasing gap between those who believe inequality is high and those who believe it is low. More unequal countries have a more divided public opinion: in Chile and the United States – two among the most unequal OECD countries – the perceptions about the extent of the top richest 10% shares diverge the most.

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Economic Activity in Myanmar to Remain at Low Levels, with the Overall Outlook Bleak

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Myanmar’s economy and people continue to be severely tested by the ongoing impacts of the military coup and the surge in COVID-19 cases in 2021. Following an expected 18 percent contraction of the economy in the year ended September 2021, the World Bank’s Myanmar Economic Monitor, released today, projects growth of 1 percent in the year to September 2022. While reflecting recent signs of stabilization in some areas, the projection remains consistent with a critically weak economy, around 30 percent smaller than it might have been in the absence of COVID-19 and the February 2021 coup.

The near-term outlook will depend on the evolution of the pandemic and the effects of conflict, together with the degree to which foreign exchange and financial sector constraints persist, as well as disruptions to other key services including electricity, logistics and digital connectivity.

“The situation and outlook for most people in Myanmar continues to be extremely worrying,” said World Bank Country Director for Myanmar, Cambodia and Lao PDR Mariam Sherman. “Recent trends of escalating conflict are concerning – firstly from a humanitarian perspective but also from the implications for economic activity. Moreover, with a low vaccination rate and inadequate health services, Myanmar is highly vulnerable to the Omicron variant of COVID-19.”

Among recent signs of economic stabilization, mobility has recovered to 2020 levels after falling around 70 percent below pre-COVID-19 baseline levels in July 2021, though it remains about 30 percent below pre-pandemic levels for retail, recreation, and transport venues. This is likely to have supported the services sector, though overall consumer demand continues to be weak due to recent shocks to incomes and employment. In the manufacturing sector, output and employment also appear to be stabilizing, and exports have recovered in recent months.

Nevertheless, economic activity continues to be affected by substantial weaknesses in both supply and demand. Firms continue to report sharp reductions in sales and profits, cashflow shortages, and a lack of adequate access to banking and internet services. Results from the latest World Bank firms’ survey indicate that around half of all companies experienced disruptions in the supply of inputs and raw materials in October, largely because of increases in costs amid logistics constraints and a sharp depreciation of the kyat. Farmers continue to be affected by higher prices for key inputs, restricted access to credit, and ongoing logistics constraints.

Ongoing economic pressures are having a substantial effect on vulnerability and food security, particularly for the poor, whose savings have been drained as a result of recent shocks. The share of Myanmar’s population living in poverty is expected to have doubled compared to pre-COVID-19 levels. Combined with pressures on agricultural production, rapid price inflation and reduced access to credit are expected to further compound food security risks.

Over the longer term, events since February 2021 are expected to limit Myanmar’s growth potential. “Most indicators suggest that private investment has fallen markedly, and previously viable projects are becoming unviable as demand remains weak, the cost of imports has risen, and kyat-denominated revenues are worth less in foreign currency terms,” said World Bank Senior Economist for Myanmar Kim Edwards. “In addition, lost months of education, together with large increases in unemployment and displacement, will substantially reduce human capital, skills and productive capacity over the longer term.”

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Structural Reforms Needed to Put Tunisia on Path to Sustainable Growth

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Decisive structural reforms and an improved business climate are essential to put Tunisia’s economy on a more sustainable path, create jobs for the growing youth population and better manage the country’s debt burden, according to the Winter 2021 Edition of the World Bank’s Tunisia Economic Monitor.

Titled “Economic Reforms to Navigate out of the Crisis” (in French, “Réformes économiques pour sortir de la crise”), the report estimates a slow economic recovery from COVID-19, with projected growth of 3% in 2021. Weighing on this recovery is rising unemployment, which increased from 15.1% to 18.4% in the third quarter of 2021, affecting the youth and people in the western regions hardest.

The report outlines how the weak recovery puts pressure on Tunisia’s already strained public finances, with the budget deficit still elevated at 7.6% in 2021, despite a small contraction from 9.4% in 2020.  The budget deficit is projected to gradually decline, reaching 5% to 7% of GDP in 2022-23, helped by lower health-related expenditures and provided that the moderately positive trajectory of spending and revenue are maintained. However, Tunisia’s rising public debt will be hard to finance without decisive public finance and economic reforms, the report noted.

“Just like everywhere else, COVID-19 has adversely affected Tunisia’s economy and the report strongly highlights the need to address longstanding challenges to sustainable growth, including improving the business environment,” said Alexandre Arrobbio, World Bank Country Manager for Tunisia. “To emerge from this crisis, Tunisia needs to adopt decisive reforms to promote private sector development, boost competitiveness and create more jobs, especially for women and youth.”

The first chapter of the report analyzes potential reasons behind Tunisia’s slow economic recovery and highlights two specific factors: the country’s reliance on tourism and transport services; and the rigidity of the business climate, including restrictions on investments and competition which constrain the reallocation of resources in the economy.

The second chapter elaborates on key barriers to competition, arguing that Tunisia’s current regulatory environment restricts competition and discourages the development of new businesses. Looking ahead, the report recommends that policy reforms to ensure a level playing field in every sector are essential in order to boost employment for Tunisians and to increase purchasing power.  

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Lebanon’s Crisis: Great Denial in the Deliberate Depression

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The scale and scope of Lebanon’s deliberate depression are leading to the disintegration of key pillars of Lebanon’s post-civil war political economy. This is being manifested by a collapse of the most basic public services; persistent and debilitating internal political discord; and mass brain drain. Meanwhile, the poor and the middle class, who were never well served under this model in the first place, are carrying the main burden of the crisis.

According to the World Bank Lebanon Economic Monitor (LEM) Fall 2021 “The Great Denial”, Lebanon’s deliberate depression is orchestrated by the country’s elite that has long captured the state and lived off its economic rents.  This capture persists despite the severity of the crisis –one of the top ten, possibly top three most severe economic collapses worldwide since the 1850s; it has come to threaten the country’s long-term stability and social peace. The country’s post-war economic development model which thrived on large capital inflows and international support in return for promises of reforms is bankrupt. In addition, the collapse is occurring in a highly unstable geo-political environment making the urgency of addressing the dire crisis even more pressing.

The LEM estimates real GDP to decline by 10.5 percent in 2021, on the back of a 21.4 contraction in 2020. In fact, Lebanon’s GDP plummeted from close to US$52 billion in 2019 to a projected US$21.8 billion in 2021, marking a 58.1 percent contraction—the highest contraction in a list of 193 countries.

Monetary and financial turmoil continue to drive crisis conditions, under a multiple exchange rate system which poses valuable challenges on the economy. The sharp deterioration in the Lebanese Lira persisted in 2021, with the US$ banknote rate and the World Bank Average Exchange rate depreciating by 211 and 219 percent (year-on-year), respectively, over the first 11 months of the year. Exchange rate pass through effects on prices have resulted in surging inflation, estimated to average 145 percent in 2021—ranking 3rd globally after Venezuela and Sudan. Inflation is a highly regressive tax, disproportionally affecting the poor and vulnerable, and more generally, people living on fixed income like pensioners. Food inflation remains concerning as it forms a larger proportion of the expenses incurred by poorer households who are struggling to make ends meet with their deteriorating purchasing power.

Government revenues are estimated to almost halve in 2021 to reach 6.6 percent of GDP, marking the 3rd lowest ratio globally after Somalia and Yemen. The expenditure contraction was even more pronounced, led partially by drastic cutbacks in primary spending, which has reinforced the economic spiral. Meanwhile, gross debt is estimated to reach 183 percent of GDP in 2021, taking Lebanon to the 4th highest ratio in the world preceded only by Japan, Sudan and Greece.

A rare relative bright spot in 2021 has been tourism, which helped hold the current account deficit-to-GDP ratio steady.

Starting Spring 2021, a disorderly termination of the foreign exchange (FX) subsidy commenced and was in full force by the summer. The path authorities followed to the subsidy removal was opaque, inadequately coordinated and lacked timely pro-poor alleviation measures. As a result, subsidy removal mostly benefited importers and smugglers while precious and scarce FX resources were drained.

“Deliberate denial during deliberate depression is creating long-lasting scars on the economy and society. Over two years into the financial crisis, Lebanon has yet to identify, least of all embark upon, a credible path toward economic and financial recovery,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “The Government of Lebanon urgently needs to move forward with the adoption of a credible, comprehensive and equitable macro-financial stabilization and recovery plan and accelerate its implementation if it is to avoid a complete destruction of its social and economic networks and immediately stop irreversible loss of human capital. The World Bank reconfirms its readiness to continue to support Lebanon in addressing the pressing needs of its people and challenges affecting their livelihoods.”

As detailed and called for in previous issues of the LEM, this strategy would be based on: (i) a new monetary policy framework that would regain confidence and stability in the exchange rate; (ii) a debt restructuring program that would achieve short-term fiscal space and medium-term debt sustainability; (iii) a comprehensive restructuring of the financial sector to regain solvency of the banking sector; (iv) a phased, equitable, fiscal adjustment to regain confidence in fiscal policy; (v) growth enhancing reforms; and (vi) enhanced social protection.

Particularly, initiating a comprehensive, well-structured and swift reform of the electricity sector is critical to address the long-standing and compounding challenges of this sector which is at the center of Lebanon’s economic and social recovery. In addition, Lebanon needs to step-up efforts to ensure efficient and prompt delivery of social protection assistance to the poor and vulnerable households struggling under the continuing economic crisis.

The Special Focus section of the LEM “Searching for the External Lift in the Deliberate Depression” examines the reasons for the weaker than expected increase in exports considering the Lebanese Lira’s sharp depreciation; it analyzes the failure thus far for the external sector to sufficiently benefit from increased price competitiveness and become a more robust driver of growth. The Special Focus finds that Lebanon’s exports are inhibited by three factors (outside of the crisis itself): (i) (pre crisis) economic fundamentals; (ii) global conditions; and (iii) political/institutional environment.

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