Dr Pia Rattenhuber on inequality in crises — an interview
How do crises such as the COVID-19 pandemic influence inequality and the other way around? This year’s UN Day Dresden put a spotlight on “Inequalities in Crises”. In an interview, we got up close and personal with our keynote speaker Dr Pia Rattenhuber (UNU-WIDER), an expert in development economics.
What is the state of inequality in the world today and what does this mean for sustainable development?
Inequality is not that straightforward to measure. When talking about inequality, we often refer to income that comes through work – gross or net income. The latter refers to what people really have in their pockets, after the government has redistributed some of the gross income through taxes and social benefits. But one can measure many other types of inequality, such as inequality of wealth, education, etc.
In developing countries, particularly, we often talk about consumption inequality – inequality in what people get to consume, which can be quite different from income inequality. This is a big technical question, and we need detailed, good-quality data for such analyses.
Between the mid-90s and the 2010s, there has been a slight decrease in inequality globally – but the picture is heterogeneous. While in some countries, inequality has reduced, in others it has increased.
Crises and inequality – how do they influence each other and vice versa?
The last big crisis that we have data for was the Financial Crisis that started in 2007. As the crisis unfolded impacts on inequality played out quite differently across time and countries, and government policies in the area of tax and social protection played a role in that.
In the current crisis, the lockdown measures have and will keep affecting our lives in many ways that may not be directly economic. If a school closes down, depending on a family’s situation, some parents might be able to offset the loss in education for their child better than others. When these children grow up, the protracted school closures that happened in their childhood will likely result in lower earnings.
In the developing world, there are concerns that the number of teen/child pregnancies and unwanted pregnancies in general might go up. A lot of women likely have less access to family planning during the pandemic, than what they would normally have access to. There are many other effects that go beyond the loss of income due to the crisis.
Both economic and non-economic factors influence each other, and at the moment we have only an early picture of the situation. However, we will only learn how these factors interact as time goes by. In health and education, people have been hit in various ways and often the not-so-well-off have been hit worst. Crises and inequality might be exacerbating each other but it will take years if not decades to have the data and produce analyses on this.
In your study, you looked at the impact of COVID-19 on five African countries. What did you find out?
We looked at five Sub-Saharan African countries in 2020, thus the early stages of the pandemic. We did not see such a substantial impact of the crisis on inequality in that short time. There was some but it was not as devastating as what we see in Latin American countries, for instance. In ways that could be more daunting though, we see that even where there is a small increase in inequality, the government measures that are either in place or that were put specifically in place because of COVID-19 were not very effective to work against the increase in poverty and inequality.
For developing countries, these are the guiding questions for policy. The existing systems are not very well equipped to cushion a very small shock. The measures that countries took on top of those were also not really large because that takes fiscal space that these countries barely have.
If the crisis is going to go on and the economic situation does not improve, this suggests that the picture for 2021 and future crises is not very optimistic. The number of reported COVID-19 cases have risen in these countries, the vaccination campaign is very slow, and even if the rest of the world picks up again, these countries are not equipped to deal well with an extended shock.
How does the SOUTHMOD project that you lead address questions of inequality?
The study on African countries that I have spoken about builds on models that we created in the SOUTHMOD project. Over the last five years, we worked with partners in participating countries, who are experts of the local tax and social protection systems. We in turn bring the knowledge on such models, software, and a lot of experience from other countries to the table. Even before COVID-19 we had a lot of video conferences and also travelled to partner countries when working on these models together with our partners.
We maintain the models by updating policies and data used by the models on a regular basis. In a nutshell, the models help you understand how government policies affect people’s incomes and ultimately consumption at the household level, and with that, questions of inequality and poverty. The models are also used to inform government policies in a direct manner, for example, when a government thinks of a policy reform and how much the reform would cost.
How does the work in the SOUTHMOD project but also UNU-WIDER’s work with tax authorities in the developing world practically look like?
When collaborating with tax authorities and similarly in the SOUTHMOD project, we work with national teams in each country to empower them with the knowledge and support that they need. In SOUTHMOD we also offer different types of trainings in each country so that people in government or academia can come to a few days’ training and learn the ropes of the models. The models are freely available on our website for non-commercial research. In some countries, we’ve had refresher courses or seminars where we have people in government come with their policy questions and policy reforms that they want to test out.
Policymakers would not care much about a model if it’s outdated. The initial building up of the model is the most intense phase. Subsequently, we increasingly see the national teams become more independent. The idea is to create a community of practitioners in each country and across countries. Increasingly, this knowledge spreads. Most of these countries don’t have any such tools at their disposal, which is a very common tool for developed countries to have.
Speaking of impact, how has your work with government authorities supported policymakers in those countries?
Getting new data is very expensive and can be a lengthy process. In a sister project, we work with tax authorities in Africa to make greater use of the data that they are already collecting. Whenever you file a tax return, you’re providing information to the government. That way data is being generated at very low cost compared to data collection in its own right. The tax authority can use these administrative data to better understand, for example, how a tax reform affects different people and how they respond to it. There are a variety of ways to use such data to provide evidence for policymakers.
In Uganda, for example, there was interest in how taxes affect small businesses. Using both the models and the tax authority’s own administrative tax data, we help them bring all the information together to increase their understanding on what the implications of different tax reforms are for tax revenue but also poverty and inequality.
On the occasion of UN Day, what are your hopes and wishes as we journey towards 2030, a landmark year for the Agenda for Sustainable Development?
To start out, I think it’s been a challenging agenda that was put forth. Of course, at that time no one was thinking such a pandemic would strike us. We need to be even smarter than before about where we put our efforts in trying to achieve as much as we can. There are quite well-founded fears that we are actually reverting on some of the progress that we had already made.
It will be ever more important for developing countries to have a voice and to mobilise their own resources. While donor money is important, in the medium to the long term, it is not the best solution. With COVID-19 we know that the fiscal space of countries including developed countries, has shrunk even further. This makes the challenges ahead even harder, but it has also become ever more obvious that countries need to become more independent.
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Policy Brief | Distributional effects of the COVID-19 pandemic in Uganda
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Policy Brief | Limited impact of the tax-benefit system in Tanzania during the COVID-19 pandemic in 2020