Coronavirus could leave the world an even more unequal place. That would be a real disaster

The pandemic is hurting small businesses, and companies that survive Covid-19 shutdowns may find themselves with less competition. This is what we have seen following the Spanish flu pandemic and the September 11 attacks

Heiwai Tang

Published: 1:00am, 7 Apr 2020

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The end of the Covid-19 tragedy still seems distant. But when the pandemic is over, it could well leave, like the 1918 Spanish flu, not just deep psychological scars, but also wider inequality among businesses and people around the world.

In a few months, when we finally feel safe and free to walk around our neighbourhoods, we may find that the small coffee shop owned by the young latte art champion or the kebab restaurant run by the refugee family no longer exists. Instead, in the nearby shopping mall that is once again packed with tourists, the global fast-food chains may all have expanded.

Small businesses are at the highest risk of bankruptcy during an economic shutdown, especially those in the service industry. American restaurateur David Chang, who owns eight restaurants in New York including one that has won him Michelin stars for 11 years, has expressed deep concern about the survival of most restaurants in Manhattan and called for government intervention.

Cash-strapped small businesses will either try to secure another bank loan to cover recurring costs or simply shut down. In the United States, the record 6.6 million unemployment claims filed in the week ending March 28 suggest many businesses have already gone for the second option.

Research shows that high-wage workers tend to be employed by larger firms, implying that many of the workers who recently got laid off by small businesses would have clustered at the lower end of the income spectrum in the US economy.

Besides service businesses, small manufacturers supplying intermediate inputs to large manufacturers and wholesale retailers in the downstream of global supply chains are most vulnerable to the bullwhip effect – the magnification of negative demand shocks from final consumers.

Some governments have sensed the severity of the problem and started taking bold action. The US government signed a relief package in late March, which includes a US$350 billion loan programme to save small businesses.

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Part of these loans can be forgiven if they are used to cover payrolls, rent or utilities for the first two months of the loan. However, banks are hesitant to offer the loans, worrying about the negative impact on their balance sheets.

Other governments may not have the fiscal space to do the same. For instance, in Hong Kong, where rental costs are among the highest in the world and the government is piling up a record budget deficit in this and probably the next few years, the government can only step up as a guarantor on bank loans to small businesses and put pressure on landlords to reduce rents.

According to the Association for Hong Kong Catering Services Management, 1,000 of the city’s 28,000 restaurants have closed since last June, and another 1,000 might fold in the next few months if the pandemic continues.

Thus, those who weather the coronavirus storm will eventually thrive as they will face less competition.

The ultimate winners are the ones who currently have market power or are well capitalised. Large businesses that have diversified portfolios, such as fast-food chains and brand-name clothing retailers, can probably use their bargaining power to negotiate with their landlords for a rent cut. Those that have the resources to deploy new technology can quickly transform their businesses, including taking them online.

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The airline industry is also likely to experience significant consolidation. It has ground to an almost complete halt due to travel bans and quarantine requirements imposed by nearly all governments across the globe. Without government bailouts, many highly-indebted airlines will go bankrupt soon, or get acquired by cash-rich competitors.

Most mergers and acquisitions in the industry are likely to be supported by the acquirers’ governments. The survivors will end up enjoying more market power and charging higher fares, as we have seen with the consolidation wave following the September 11 attacks in 2001.

Yet another example is the education sector, to which I belong. Many teachers have just given the first live-streamed lectures in their lives. Hundreds of millions of students, who now have to take all courses online, are realising that e-learning may not be so bad.

They may also discover that another lecturer who teaches a very similar course at a university thousands of miles away is far better.

Emerging from the pandemic, the world will have a gigantic repository of recorded lectures. Some will never be played again, while those by the best teachers will find a large global audience. Economies of scale mean that new businesses, above and beyond massive open online courses, will emerge to help the star teachers market their courses.

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Further, income and wealth inequality is likely to rise in the wake of the pandemic, thanks to quantitative easing and interventions by central banks around the world. The massive asset purchases will push prices far higher than previous market peaks, benefiting mostly the asset owners.

We have already seen a similar phenomenon during the recovery from the global financial crisis of 2008 and 2009, when trillion-dollar packages from central banks in major economies boosted asset prices globally.

Mild consumer price inflation and weak job growth followed in advanced economies, signifying that the expected wealth effect failed to trickle down and increase demand in the real economy. Instead, the wealth gap between the rich and poor increased to an unprecedented level.

A similar rise in wealth inequality was also seen in China, after the 4 trillion yuan (US$586 billion) stimulus package in 2008-2009 led to overheating equity markets and booming housing markets in most cities. Capital allocation across firms was also shown to be less efficient, with politically connected companies getting much easier access to credit.

Coincidentally, as would be familiar to anyone who has read The Great Gatsby, wealth inequality exploded in America in the 1920s, after the Spanish flu pandemic. The gap would only be closed by the Great Depression, and then the second world war.

To prevent the next global crisis from brewing and flaring, we should all be mindful that the current pandemic might leave another legacy of inequality.

Heiwai Tang is Professor of Economics and associate director of the Institute for China and Global Development at the University of Hong Kong

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