The coronavirus crisis and China’s inequality

Walter Scheidel’s book The Great Leveller argues that pandemics, along with war and state collapse, are among the historical forces that have been able to drastically reduce economic inequality (I am sorry to say I have not read Scheidel’s book myself, so am relying on reviews for this summary).

Yet less epochal crises, like your common or garden-variety recession, generally tend to increase inequality. When the proportion of the population that is unemployed rises, inequality widens. A recession therefore always increases inequality, at least temporarily; whether that increase is later reversed depends on how the recovery plays out. The people who lose their jobs in a recession, and the companies who have to shut down, are often those whose situations were most fragile to begin with. Bigger companies and wealthier individuals are pretty much by definition better placed to handle economic downturns, so economic stress can reinforce inequality.

It’s an interesting question what kind of crisis the coronavirus epidemic, and the massive shutdown of China’s economy that it has sparked, will prove to be: one that reinforces existing inequality, or one that breaks the mold? My guess is that this crisis is going to strengthen China’s patterns of state-capitalist inequality. The quarantines, travel restrictions and business closures are not a process of breaking down institutions, but rather the exertion of China’s state power on a massive scale. The people and companies who suffer most from the shutdown are those that were already disadvantaged in the system.

The strict restrictions on cross-provincial travel (which are starting to be unwound) and quarantine requirements for people who cross provincial borders disproportionately affect China’s hundreds of millions of migrant workers, people who leave their home regions for jobs elsewhere. For decades migrants have fallen through the cracks of social programs and government policy because their job and their household registration are not in the same place. Now they can’t even get to their jobs, and if they don’t lose their job will still have lost weeks of pay they will not get back. White-collar office workers may grumble about the tedium of working from home, but at least they are still drawing a salary. Wage and income inequality is therefore likely to widen this year.

The loss of revenue to businesses from the extended closures and quarantines is also uneven. Most of China’s state-owned enterprises declared they had reopened soon after the official holiday ended on February. But it has taken much longer for smaller and private-sector companies. According to the industry ministry, only 30% of small- and medium-sized enterprises had resumed operation as of the last week of February. Even among China’s largest 500 companies, more state companies got back online than private-sector one. State companies tend to be larger, have more cash reserves and better access to credit than private-sector ones, so they are inherently better positioned to survive the shutdown. It thus seems very likely that large and/or state-owned companies will gain market share this year as small businesses struggle.

Businesses closed during the outbreak

The government has announced numerous policies to aid small and private businesses suffering as a result of the coronavirus, but getting this special help usually requires getting on some government list. Forcing companies to jump through administrative hoops is an inherently unequal process that favors more-organized and better-connected companies.

Officials surely have good technocratic reasons for preferring these kind of “targeted” measures. But there could be a distributional case for using more macro policy: lowering interest rates for all companies, not just those on a list designated for special support, and running the economy hotter so that those who lost their jobs during the shutdown will get them back more quickly. To which the counter argument might be: stimulus would also just flow to local governments and state enterprises, and increase economic imbalances in the bargain. Which shows just how hard it can be to alter an entrenched structure of inequality.

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