Understanding Global Inequality

Branko Milanovic, what is your diagnosis of global inequality as it stands and where do we stand in historical terms?

Yes, let me start maybe with the historical terms first. Where we stand now is that since around 2000, global inequality has probably declined, and I have to say “probably” because obviously our data are very shaky when it goes back to the past, but probably for the first time since the beginning of the Industrial Revolution global inequality is down.

Global inequality has been rising since the 1850s, essentially driven by the success of the currently advanced rich countries that became much richer than the rest of the world and thus increased the gaps between themselves and the rest of the world (essentially China and India), and of course increased inequality between world citizens.

Then global inequality peaked, although it was a long plateau, from probably the 1970s to the 1990s or even early 2000s. And then there was a decline in the last 15 years and that decline is driven by the reversal of the process that I mentioned before. Nowadays it is the catch-up by Asia and especially by China and more recently India with the rich world that reduces global inequality.

So that’s how I think one can in a nutshell describe the movement of global inequality over the past two centuries.

What are the major issues today as we stand? What would you say is the most pressing?

First, the level of global inequality is extremely high, so that’s one thing that needs to be kept in mind. Because when we say that global inequality is most likely now on the decline, it does sound very good, and indeed it is much better than the reverse.

However, one should not forget that what is truly more important is the extremely high level of global inequality which still exists. Now, that level is higher than the level in  even the most unequal countries such as South Africa or Brazil or Colombia.

The most pressing issue perhaps is the composition of global inequality which is driven by large gaps between mean incomes among countries.

I think this is important for two reasons. One, because it leads to what I call “the citizenship rent” which means that people born in rich countries have, regardless of their work effort, much higher incomes than others, which to some extent globally speaking implies lack of global equality of opportunity.

The second is that this particular structure of global inequality is conducive to migration. So, in that sense, migration may be regarded as a movement of people within specific conditions of current globalisation where most inequality is due to differences in countries’ development.

And where do you see the tension between inequality within countries and inequality between countries?

We pretty well still have the situation where inequalities within countries are rising, whereas inequalities between countries are going down.

Now, since inequalities between countries are more important in terms of overall impact, it is more important from a global perspective that China or India should grow fast than what happens to inequalities within China and India, in that sense, the fact that we do have some convergence of mean incomes (or GDPs per capita) is a very good news.

On the other hand, the fact that we continue to have increases in within-national inequalities, albeit much more modest recently,  means that the gain that we would have obtained from convergence between nations are  lower simply because, technically speaking, increased national inequalities reduce the gain that we get from that effect of income convergence.

And what are the main drivers of inequality? Are they the same in different parts of the world? Are there significant differences? What are the driving forces behind this?

I think historically the main drivers of within national inequalities are many. There are what I call ‘benign forces’ and ‘malign forces’. Among the benign forces were, of course, mass education and technological change, globalisation, social transfers, trade unions, and economic policies, in particular taxation and social transfers.

Then among the malign forces were, of course, the First and Second World Wars and other wars, and, before, in pre-modern times, epidemics as well.

This is very, very broad sketch obviously, but if we want to look more recently at the last 20 years and at the rich countries, we know that increasing inequality within nations was driven by technological change and by globalisation – and I think the two of them, while conceptually different, are very difficult or impossible to disentangle in terms of their effects.

If you link this discussion with some other topics we’ve dealt with on Social Europe, especially how new technologies might change the shape of the economy and labour markets in particular, how do you see this playing out? If some of the promises or predictions of the digital revolution come about, would that further exacerbate inequalities?

That’s of course difficult to say because the gamut of opinion ranges from very pessimistic where the robots replace all human labour and people have no jobs and this  increases inequality to the very optimistic outcomes where essentially we live in cornucopia, land of plenty, and where we don’t need to work or work very little or much less than we are working today.

I’m rather on the optimistic side, in this case at least. I don’t think that we should really fear technological change as such because had we feared that in the past, then certainly we would not have developed and we would not be where we are today.

But let me say one thing which could be negative or might lead to an increase in inequality. It is that if there is an increase in returns to capital and an increase in the share of capital incomes in  total net product, then the very fact that ownership of capital is extremely concentrated means that this would give an extra push to inequality within nations.

Just to make it very clear: if for example ownership of capital were more equal, then the rising capital share would not be a problem because it would leave overall inequality unchanged or even reduce it.

But the fact is that, historically, ownership of capital and income from capital have been very concentrated. So, when you have an increasing importance of  that particular type of income, that pushes inequality up.

So this is a discussion we’ve had with people like Richard Freeman who proposed the workers’ shares and about special-purpose vehicles, for instance such as sovereign wealth funds, to the point that capital ownership in this context should be rethought because the current concentration is bound to make problems worse.

Yes, I totally agree with that. I actually think that all the attempts, like for example what Richard Freeman was mentioning plus employee stock ownership plans, or the 1980s idea in Sweden of stock ownership by trade unions, and of course more recently by Tony Atkinson in his book about what to do with inequality (which goes back to James Meade’s 1970s notion of a shareholders society), well,  I think that all such attempts to reduce the concentration of capital are extremely important especially in societies where the share of capital in total income is rising.

Reducing concentration of capital is important for another reason too: because our conventional, or maybe to some extent traditional, methods of reducing inequality through taxation and transfers have reached their limits.

In other words, it seems to me today that among the electorate there is not much taste for increasing taxes on the middle class. There may be some acceptance of very high tax rates on the rich, although even of that I’m not quite sure, but certainly I think we have reached a limit on taxation of the middle classes.

So, if you want to have lower inequality, then really a way to do that is to make market income, which basically means concentration of income from capital, much more equal.

So we have to intervene in the economy in a way that the primary distribution doesn’t leave too much to be done via the secondary distribution by the tax system.

Yes, I think that’s absolutely crucial. I believe this is what in some sense will be the 21^st century solution for not allowing income inequality to get out of bounds. It is to be really “working” on the distribution of endowments.

This means, obviously, reducing disparities in capital endowments but also in human capital, not only in the number of years of education but also in the returns that people  get from that education. These returns, especially in the US but in the UK also, are very uneven, possibly because of the differences in the quality of schools and this then leads to the very different returns that people get from private schools versus public schools. And access to the former is limited simply because they are much more expensive and also require type of “knowledge” and connections that are very hard for children to obtain when growibng up in more modest circumstances.

I think working on this pre-distribution stage is crucial.

This discussion brings us to the broader point. This is some of the mechanisms that should be used to prevent inequality from growing too much, but what else should be done in terms of general political reforms to reform globalisation and make it more conducive to a more even development with less inequality?

This is probably more difficult because there you’re really facing problems in  the way globalisation is organized or the whole international architecture that we have built in the last 60 years has been constructed.

So undoing certain features of that is very difficult. I’m not even sure, for example, if all these trade agreements, which now seem to be dead in the water, I am not sure whether bringing them back would be helpful or not.

Making changes in this area is much more difficult also because anything that you would want to do would require coordination between different governments. Even the US would be unable to do it alone. It thus requires a level of coordination that is hard to imagine today.

But let me try to put it more specifically. For example, coordination on the issue of tax evasion is quite feasible because it affects all the governments that lose tax revenues. Of course, there are some countries that benefit from tax evasion, but they are relatively small and not that important and other bigger countries would be able to stop it.

So there are some areas where I think coordination may be forthcoming. But there are many other areas, for example intellectual property rights, pharmaceutical patents, labour standards or labour rights and so on where there are obvious differences of interest between countries.

When we talk about trade agreements it probably depends on what kind of content you write into them. It’s not beyond belief that there could be trade agreements that enshrine higher social and environmental standards, whereas what we seem to see is the attempt to enshrine the supremacy of private interests over public interests, for instance via investment protection.

Yes, that’s true.

Maybe therefore it’s unsurprising that there is resistance.

Absolutely. Because of course when we say “trade agreements”, it doesn’t really say very much, it doesn’t tell us at all what is inside that trade agreement.

Of course, the argument has been made that it’s very difficult to judge the validity of these trade agreements because many negotiations and deals are secret. You have to learn from the leaks whatever is going on during the negotiation process.

But, certainly, there could be very progressive things that could be enshrined in trade agreements. One possibility is much greater protection of workers’ rights. Still  the current way they have apparently been drawn up is rather the reverse.

Exactly. Not even basic ILO standards are apparently enshrined in these sort of agreements, let alone any more. And the fact that most of it is negotiated in secret behind closed doors is not really a trust-building exercise.

Yes, I think that’s the least that one could say. I was once present when a Nobel prize-winning economist said that he had to rely on hearing details from people who were there negotiating and they leaked these details of trade agreements to him. That’s absolutely unacceptable—that it takes place totally behind closed doors.

Going beyond the things that should change in terms of managing globalisation, we cannot finish without referring to what has recently happened with the election of Donald Trump. Is it now more likely that globalisation has been thrown into reverse mode rather than reform mode?

On the topic of globalisation, I would also like to say that in principle I think that globalization is a very good thing and is a force for the good. We have seen that in the effects of globalisation around the world, including even in the rich countries, even if, because of the way that it was managed and because of the way that domestic policies have been going, it has left significant chunks of people dissatisfied or unhappy.

That brings us of course to the Brexit and the election of Donald Trump, which both clearly show that the numbers of people who have been left out are significant and these people have eventually realised that they have found a champion who they believe is going to help them.

Whether that champion is going to help them though is a big question. I don’t believe that he or anybody similar to him, such as Marine Le Pen in France tomorrow, might be able to do much.

I definitely see globalisation as we have seen it in the last 30 years as coming not necessarily to a halt but to a different stage. Maybe I’m too optimistic, but I don’t see a significant reversal, simply because of the difficulty of implementing such a reversal.

I think that the Brexit is a very good example of that because once you start trying to go into the Brexit mode and even further when one day it has to be implemented jointly with the EU (and it’s a big question whether it will ever be implemented), then you really discover thousands of problems.

Likewise I believe that Trump, when he tries to do certain things, will discover many problems and will find out that many people around him or people who have been his supporters might lose. There would not be, I think, real ability to reverse course.

But, on the other hand, I don’t think that we’re going to continue on the same path of greater and greater globalisation and integration of markets that we have had in the last 30 years.

To an extent, the electorate in the UK and in the US have to live with the situation that even Trump or the people in charge here simply cannot resolve. You can see that particularly in the UK where there are so many internal contradictions in what the mission appears to be that it’s impossible to resolve this question.

I believe so and, also with Trump it’s even more obvious because there are different parts of his programme -if one can even say there is a programme- that are clearly incompatible. And there are parts, as I said before, that if he were to try to implement would be perceived very unfavourably by the groups who voted for him. So that would really make it very difficult for him to go further down that path.

But there seems to be nevertheless little doubt that there has to be a transformation of globalisation as we’ve seen it. Because we’ve had socio-economic grievances as a result of globalisation that translated more and more as time went on into distrust in the political system to effect positive change for people, up to the point where now anybody seen as an outsider has a realistic shout because people feel disenfranchised and they’re unable to effect positive change in their lives.

Yes, I could not agree more with that because what has happened is rising distrust in the political system and clearly rising distrust towards the establishment or the elite, whatever you want to call them.

To a large extent I do blame the elites for that because obvious self-interest on their part would have taught them to realise that there was discontent and there were some measures that should have been taken to, I’m not saying solve the problems, but at least make the problems less obvious or less sharp for a significant percentage of the population.

Now, of course, these problems will be dealt with by those who come to power on a very populist platform and maybe they will be unable to do anything, but certainly ‘the solution’ for it will be done by the outsiders. This was really a mistake and probably people from the establishment now realise too that it was a mistake.

there is a general tendency apparently built-in and especially in political systems based on two-party competition to underestimating what is really going on underneath the surface until there is a violent swing that expresses itself in the election results. But if you look at the elections in the UK and in the US, it’s just the final drop that makes a difference and then leads to quite a violent political swing.

Right. But, of course, that is the feature of the systems where the winner takes all and it also, to be quite honest, has to be said that that particular system often benefited the other side, not the populists.

There is not much of a swing in the vote because it really requires relatively few votes and in the US case, even more spectacularly, it requires very specific votes in specific states to produce the shift, even if the overall number of popular votes, as we see now, is very different and Hillary obviously got more than Trump.

But it is also true that that particular logic very often benefited the incumbents as you know from the UK system: the ability of for example UKIP to have seats in the parliament was very limited and totally disproportionate with their influence in terms of votes.

But one thing which concerns us is that what happened with the Brexit and with Trump could have further effects on the rest of western Europe, in particular Italy or France and possibly even Germany.

We see that sort of dynamic playing out very badly to some extent because Brexit certainly helped Trump in the US, and now what happened in the US has global consequences and might actually help similar parties in Western Europe, in particular France, Italy, Germany but additionally in the Netherlands, possibly in Sweden and elsewhere.

Well, we’ve been dealt at least two wake-up calls now and we’ll see whether this is the end or just the beginning.

I hope that by the end of the next year we shall have a little bit better news.

Branko Milanovic was in conversation with Henning Meyer, Editor-In-Chief, Social Europe

Also have a look at our focus page “What is inequality”