Financial recovery and prevention of disasters must be inclusive

Financial recovery and prevention of disasters must be inclusive
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As the COVID-19 pandemic grips the world, the urgency to save lives has become a top priority. 

With the rising incidence of extreme health and climate disasters, it is time to recognize the need for greater socio-economic inclusion to help build resilience against these severe shocks.  

Making growth more inclusive of underserved populations is one of the tougher economic challenges everywhere. 

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For the United States, which has about the highest income inequality among industrialized nations, this is an opportunity to invest far more inclusively, starting with the implementation of the first stimulus package, then continuing with the design of future economic relief packages. 

The novel coronavirus crisis is putting a spotlight on the United States’ wide income gap and the plight of its poor — particularly those in the lowest 20 percent of the income distribution, who earn only 3 percent of the national income. On the other end of the spectrum, the top 10 percent of earners make more than 50 percent of the national income.

Evidence around the world shows lower income groups are hit hardest by disasters. In East Asia and the Pacific, for example, the World Bank forecasts that instead of 35 million being lifted out of poverty in 2020, 11 million will fall back into poverty because of the pandemic. 

Studies have linked investments in education, health and social capital to better resilience against disasters. In Indonesia, for instance, access to improved education has been linked to a better ability to cope with and recover from extreme events. 

The unequal distribution of people’s status in health and education in the United States will likely make it harder for poor families — and society — to respond to calamities.  

The significance of inequality goes beyond income. There is evidence from COVID-19 that income inequality is understating the true disparity in health care. For instance, the poor, in contrast to those who are well-off, wait long to seek medical attention, because oftentimes they don’t have access to health insurance.

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After disasters, safety nets must favor low-income groups who are hit the hardest. Studies by the Asian Development Bank find that vulnerability to food and general price increases and to natural disasters raises the poverty line by about 20 percent. 

Progressive spending is needed as countries rebuild their economies once the pandemic ends. Economic rebound will be stronger if a greater proportion of people — from low to high income earners —participate in that growth. 

It would be a huge lost opportunity if the effort to bounce back from crises — like coronavirus — is mainly driven by those on the higher rungs of the income ladder. International Monetary Fund studies find that lesser inequality is associated with faster and more durable growth.   

The contribution of greater equality to growth has implications for how the United States spends the $2 trillion stimulus package and future ones. 

A part of the spending is directly linked to improving health systems. Another part rightly provides a social safety net to the poor hurt by the pandemic. The biggest share, 44 percent of the total, is to help businesses — big and small — recover. 

The bailout for businesses should not put big corporations and banks first —  they have already benefited vastly from the Trump administration’s tax cuts over the past few years. Allocating funds for those who are lower income earners will have more sustained payoffs as the country attempts to recover from the coronavirus fallout. 

It’s worth stressing the capabilities to drive growth will not be enhanced by simply reallocating a large portion of stimulus funding to low-income households. Rather than just redistributing these funds, it would be better to invest in the capabilities of lower income groups in ways that also make them and the economy more resilient to big shocks. 

The United Nations’ global framework for disaster risk reduction recognizes the value of improving the living conditions of the poor, improving basic infrastructure, diversifying sources of growth and providing basic education and health. 

A striking example of the contribution of education and health is the performance of the state of Kerala in India in comparison to the other states not only in dealing with the COVID-19 crisis but a series of health and natural calamities before. 

The United States has the chance to use public investments to strengthen the education and health of its middle class and lower-income population. This would not only reduce the nation’s high vulnerability to future public emergencies but also be part of a smart strategy for economic revival. 

Vinod Thomas is former senior vice president at the World Bank, Washington D.C.; and visiting professor at Asian Institute of Management, Manila, Philippines.