Covid-19 and the Impact on poverty

The COVID-19 pandemic and ensuing global economic crisis are on course to reverse years of gains in the reduction and alleviation of poverty, thus drastically undermining global efforts to meet the SDG deadline of eradicating extreme poverty by 2030.1 In the mid-2020 update of the World Economic Situation and Prospects (WESP), UNDESA estimated that over 34 million people will be pushed into extreme poverty this year alone. This is already very much on the optimistic end of forecasts—the World Bank now predicts that between 71 million and 100 million people will be pushed into extreme poverty this year, erasing almost all progress made in the last five years in the fight against extreme poverty. UNICEF and Save the Children warn that the pandemic could push 86 million children into poverty, an increase of 15 per cent relative to the baseline. As the pandemic is spreading across developing countries, the eradication of extreme poverty, currently affecting around 680 million people, seems nearly utopian.

While extreme poverty is driven by many factors, a couple stand out in the current crisis. Plummeting economic growth is increasing poverty and exacerbating existing inequalities. Factories are shuttered, domestic demand is curtailed, investments are postponed, and global trade has fallen sharply, thus jeopardizing innumerable jobs. At the household level, unemployment and loss of income, and high healthcare expenditures are the most prominent reasons for people to slip into poverty. As such, people living in countries with a large informal sector, with poor or inaccessible healthcare and a weak social protection system are particularly at risk. Indeed, the ILO estimated that relative poverty among informal workers increased in the first month of the crisis by 56 percentage points in lower-middle- and low-income countries, and by over 62 per cent in Africa. Nearly all sectors have been hammered, but tourism and manufacturing stand out due to their importance to provide employment for low-skilled people in developing countries.

Children in poor households also suffer disproportionally from the closure of schools, as they miss out on essential school meals and may find it harder to access digital learning in oftentimes overcrowded and poorly connected environments. In addition, girls may be required to take care of their younger siblings thereby missing school. The World Bank estimates that the current school closures will cause over 7 million primary and secondary students to drop out, substantially decreasing their expected lifetime earnings and drastically increasing their chances of living in poverty. Some 24 million additional children and youth may drop out or not have access to school next year due to the pandemic’s economic impact alone. Youth are also more likely to be in informal employment and in unemployment than adults.

As living in poverty usually implies a greater exposure to COVID-19 and its economic impact, the crisis is, in effect, also bringing about a vicious cycle between growing poverty and inequality. Indeed, the most vulnerable have been hit the hardest by both lockdowns and the direct health threat of the pandemic, while people in high-skills service jobs in the formal sector are more likely to be able to work online from home and thus enjoy significantly more protection. The rich and middle-class are also expected to benefit the most from the gains from technological shifts following the crisis, while poor households are likely to remain trapped in poverty, enduring a lasting deterioration in income, health and educational outcomes. These risks, if not adequately addressed, could stunt social mobility and exacerbate inequality for years to come. A sudden spike in poverty and inequality from the current crisis will thus have long-lasting effects.

Growth, poverty and inequality scenarios

On a macroeconomic level, changes in the poverty rate can be decomposed into a growth component and a redistribution component. All else equal, economic growth helps lift families out of extreme poverty by boosting average household consumption. Similarly, inequality reductions allow households on the lower end of the income distribution to gain even when economic growth remains unchanged. Reduced inequality also raises the economic growth potential and even multiplies the benign effects of economic growth on poverty reduction, thus creating a double dividend for poverty. Sadly, the world is currently experiencing the complete opposite: widespread economic decline and increasing poverty and inequalities.

The following scenarios estimate the effects of varying shocks to economic growth and income distribution for developing countries, with divergent recovery paths post-2021. Specifically, each scenario represents different assumptions about per capita GDP growth and changes in inequality in developing countries vis-à-vis their baseline forecasts from the WESP 2020 update, which projects a weighted 2021–2030 average of 3.9 per cent GDP per capita growth (bearing in mind that individual country forecasts differ widely) and unchanging inequality through 2030.

The optimistic scenario assumes average GDP per capita growth in developing countries to be 3 percentage points above each country’s baseline—with a weighted average of 6.9 per cent per year—from 2021 until 2030 and a cumulative reduction of inequality of 25 per cent. (For context, there have only been observed inequality declines of this magnitude in fourteen developing countries since 1970.) This scenario would be plausible if a COVID-19 vaccine completely turns around the current prospects for developing countries and their policymakers manage to substantially boost pro-poor growth through stimulus spending.

In contrast, the pessimistic scenario explores the alternative outcomes for a reduction in annual GDP per capita growth by 2 percentage points and an increase in inequality of 25 per cent in all developing countries. This scenario could materialize if the pandemic were to aggravate existing weaknesses for developing countries, such as high levels of debt, increasing business failures and bankruptcies, lack of fiscal space and weak educational systems, leading to long-term stagnation of productivity growth.

To investigate the relative importance of growth versus inequality for poverty, a growth only scenario has also been modeled in which GDP per capita growth is raised to that of the optimistic scenario, but inequality is kept unchanged. This could happen if government stimulus in developing countries were to effectively turn the economic crisis around but fail to address structural sources of inequality. Finally, also included is a utopian poverty miracle scenario of unprecedented average GDP per capita growth of nearly 10 per cent per year and a spectacular reduction in inequality in all developing countries.

Department of Economic and Social Affairs - United Nations