COVID-19 amplifies inequality. Fight back with long-term thinking

The 2020 COVID-19 pandemic and social and economic responses are amplifying social inequalities and hampering strategic, long-term investments into sustainability by firms and governments. Misum’s (Mistra Center for Sustainable Markets) forthcoming trans-disciplinary chapter, “Sustainability, COVID-19 and staying focused on the longer term”, in Sweden through the crisis, focuses on how the global response to the pandemic has slowed progress toward the Sustainable Development Goals adopted by the United Nations in 2015.

COVID-19 and the rise of social inequalities

Within just a few months of the start of the crisis, gender and social inequalities are visibly increasing for several reasons. In a study of UK consumption data, economist Paolo Surico at the London Business School and colleagues reported that low-income groups were most severely affected by the economic consequences of the crisis. One reason may be that high earners and highly-skilled employees appear more able to work from home than low-income, low-skilled workers. The pandemic is also disproportionately affecting women because they comprise the majority of health and service care workers, who work longer hours and face an increased risk of infection. The pandemic is also increasing inequality of opportunities because schools and universities serving at least 1.5 billion students have closed according to the latest United Nations Educational, Scientific and Cultural Organization (UNESCO) data.

Studies of the recent Ebola pandemic in Western Africa in 2014-2015 suggest that the health and social costs of the COVID-19 pandemic will be even higher in emerging markets than in developed countries. A survey in Sierra Leone showed that during the Ebola crisis the non-agricultural informal sector was hardest hit by a 54% drop in revenues, with female entrepreneurs being particularly affected. Similarly, the United Nations Children’s Fund (UNICEF) estimated that 5 million children may have lost a year of education to the 2014-2015 Ebola crisis. Many children never go back to school. Households remove their children from schools in response to income shocks, sometimes in order to increase the level of child labour. Worse, the burden is not equally shared within or across households.

In many settings, girls bear more of the costs: in Indonesia and Uganda, for instance, income shocks negatively affect socio-economic outcomes, including educational achievements, only among women and girls. Estimates from one district in Sierra Leone revealed that the number of deaths was 3.4 times higher during the outbreak compared to a year before, with 42% occurring in children less than five years old. Of all these deaths, only 2% were attributed to Ebola.

A similar trend is already evident in India, where significant reductions in infant and maternal health utilization have followed in the wake of the COVID-19 outbreak. Safe measures that encourage and enable citizens to maintain public health investments such as immunizations, antenatal care and other healthcare needs, need to remain on the agenda in order to reduce the number of indirect and unnecessary deaths during the pandemic period. Coordinated support from the international community is needed to limit the development of negative socio-economic impacts such as these in low-income countries.

COVID-19 is choking strategic, long-term investments

In addition to the rise in social inequalities, we expect COVID-19 to have negative impacts on the transition to more sustainable markets by reducing the ability and willingness of firms to make strategic investments.

The first reason is the cash-flow spiral framework. This is where the pandemic leads to a substantial reduction in household demand, resulting in firms losing their cash flow, potentially sending them into default, which in response implies that workers lose their jobs, further lowering the demand by households. The COVID-19 crisis has also locked down production (supply), which further reinforces this negative cash-flow spiral. This is already being observed in China – the first country that has experienced the full cycle of the pandemic – where manufacturers are dealing with the double shock of the lockdown impacts and a subsequent drop in demand from customers.

A second mechanism that can negatively affect the willingness of even cash-rich firms to invest in the long-term is short-termism. Corporate decision makers, sometimes in response to investor pressure, prioritize short-term crisis management over long-term value. Consider, for example, the more than 1 million workers in the Bangladeshi garment industry who face unemployment as foreign firms cut orders. Some of the major brands (such as H&M and Inditex to mention a few) that purchase large shares of their apparel from Bangladesh agreed to pay suppliers for the current orders, which they may not be able to sell, in order to sustain their close relationships with suppliers they hope will be there for them after the pandemic subsides. Other major buyers, in contrast, have cancelled orders that were completed or in progress, prioritizing their short-term interests at the cost of longer-term relationships and sustainability.

The biggest takeaway is that COVID-19 poses at least two important challenges for the ongoing transition towards more sustainable markets: an increase in inequality and the abandonment of strategic investments into sustainability. The risk of only prioritizing the closest fires over those that are ongoing slow burners, can have devastating consequences. As firms and governments rush to extinguish the many immediate crises related to the COVID-19 pandemic, they also urgently need to protect and deploy resources that safeguard people and economies for a Great Reset along a more sustainable path.

This article is based on the paper by Misum (forthcoming). Sustainability, COVID-19 and staying focused on the longer term. In M. Carlsson-Wall et al. (Eds.), Sweden through the crisis. Stockholm: SIR, Stockholm School of Economics Institute for Research.