Why Global Inequality Matters

Let me start by enquiring about the importance assumed by inequality in the public debate during these last years. As we know, inequality has been marginalised both in academia and in politics – also and especially on the left, which should have been the most sensitive to social issues. Then, all at once, with the outbreak of the crisis, inequality has assumed a central role that was, until very recently, unpredictable. Newspapers talk about it, and it is even a topic of discussion among the Democratic candidates to the White House. What do you think has changed?

Given the nature of the question, I will have to split the answer in two. Let me start from why all of a sudden inequality has become a much discussed subject. It seems clear to me that the origin of this change has been the economic crisis. It is the material factors that affect people’s lives, and their way of thinking: inequality, to be sure, is not a new phenomenon, but for 25 years the middle class has been able to mask the absence of income growth through access to credit, that is, borrowing. With the crisis, however, this bubble burst, and all of a sudden millions of ordinary people were hit very hard, started to lose out because the economy was in recession and wages went down; and they could not repay the loans they had contracted, especially those in the real estate market. Do not forget that American private debt was higher than the (country’s) GDP.

And soon they realized what their material conditions really were and that they had not really seen any economic growth for over 25 years. And, at the same time, that there was instead a class of people, the famous 1%, or if you want the 5%, who had done extremely well. So, the reason that sparked this interest in inequality has been the absence of income growth and the realization that this very absence of growth did not apply to everybody – in the past someone had become very rich while the economy stagnated for so many others. And this “discovery” had a big impact, hit the public consciousness, raised awareness and that’s why inequality has become so popular a theme. I think the importance played by Occupy here in the US, the Indignados in Spain and, of course, by Syriza in Greece is the result of this shock.

The second part of the question was why inequality before the crisis was not a major political issue, especially on the left. The answer is simple: there was no real left ready to take up the issue. The left disappeared. Over the past decades, the left has moved to the center, in some cases, and I’m thinking particularly of Spain, became the center-right. In technical terms, if you were to draw a line using the political parameters of the 70s, the present PSOE would be a party of the center-right. The same can be said of the policies of the French Socialist Party, and, of course, Italy, where the Democrats are former communists now firmly on the right, de facto. These parties did not pose any question about inequality, they simply followed the neo-classical approach, a watered down version of Thatcherism, which of course avoided any such topics.

This is why such a politically sensitive topic was ignored. Then, when the crisis hit, there was a strong disillusionment, especially among young people, both in respect of the economic model and political representation and that’s why we had all these interesting developments in recent years.

Let’s stick to this political issue. What you’re saying is that the left has long ceased to be left, and after the crisis we had new movements in Spain, Greece. But not necessarily elsewhere. In Italy there is the 5 Star Movement that seems to care more about political corruption than inequality. More generally, in nearly all major European countries, what used to be the old left does not appear to really rethink its role. The risk, I think, is that these new instances related to the post-crisis shock are therefore not represented.

In reality, this argument is flawed – it thinks of the representation of the social classes affected by the crisis only in reference to the left. Conversely, the losers of the crisis can safely find political representation on the right. And that’s what’s happening. With the exception of Mediterranean Europe – where there is a shift to the left, with the socialist government in Portugal and Syriza (in Greece), and with the rise of Podemos in Spain – the rest of Europe, however, is moving to the right. It is, however, a different right from that of Margaret Thatcher; it is protectionist, xenophobic and, to some extent, anti-globalization. Inequality is feeding both the radical left and the right, while the centrist parties are progressively squeezed.

I’ll be honest, I really cannot understand why anybody who is young or middle-aged in France could vote for Hollande. What do the Socialists stand for in France? They follow right-wing policies domestically; they do liberal imperialism abroad. So one might as well vote for Sarkozy, at least he is the original, not the copy. Next, as far as eastern Europe is concerned, there is not even a single left-wing party. Of course, this is in part a reaction to historical circumstances: in Greece or Spain, there was a sharp movement to the left after decades of semi-fascist dictatorships and now in eastern Europe there is a reaction to the communist regimes that were in power since the end of World War II until 1989. If we look at the latest elections in Hungary and Poland, we have only the right. In Warsaw, after the last elections, the left has no longer any institutional representation.

Hence the growing importance of the issue of inequality does not automatically lead to a left turn; it may very well feed the right. It’s a process that we can see even in the US: surely dissatisfaction with the crisis feeds Bernie Sanders but also Donald Trump. And in Europe, it is Marine Le Pen, after all, who benefits from this new political climate.

Parallel to the changes in political discourse we talked about, the issue of inequality has become a crucial component of the academic debate, especially among economists. Until not long ago, inequality was a research topic almost ostracized: the neo-classical thinking that has monopolized the study of economics simply ignored the issue, focusing on market efficiency and suspicious that any attempts to reduce economic inequalities would worsen its efficiency. Poverty, and not inequality per se, was addressed by the idea of ​​trickle down: economic growth enriches the upper classes – the capitalists – but then descends slowly down through the social ladder. As a consequence, there were not many of you studying inequality. Now things have changed and, especially after the release of Piketty’s book, Capital in the XXI Century, more and more economists are talking about inequality, which has also become a topic of economic policy. What happened?

Let’s start from the beginning – why the neo-classical theory did not, and still does not study economic inequality. The reasons are very clear: inequality simply stems from the assumptions of the economic model, hence it does not need further research. In a model of perfect competition, prices are determined in the market – there is no variable like power in the neo-classical models; and inequalities in income arise simply from differences in the initial endowments with which each agent comes to the market – and these endowments are taken as a given, they are exogenous to the model.

Moreover, we know empirically that the distribution of the national product between capital and labour is more or less stable – and there is no need to study this, either.

So, people were still studying personal income distribution, but only a very small minority of scholars engaged in that research and it was not even well understood where it should be attached, where it belonged in economics: if the theory of production and growth is not relevant; and functional income distribution is stable; then we can study personal income distribution, but it is like in a void – when I started working on this matter, many years ago, there was no literature classification in the Journal of Economic Literature, it was very difficult even to find where to put your paper. In this, Piketty is very important because he gives clear analytical reading: we start from the theory of production and growth, we analyse the functional distribution of income and then we move from there to personal income distribution.

However, together with this technical reason, there was also a very political reason for this marginalisation. Every study on inequality, of course, challenges the structures not only of the economy but also of the world we live in, and these questions are not always welcome. As I wrote in my book “Haves and Have-Nots”, it was very, very difficult to get any type of grants for research on inequality.

Early in my career, in Yugoslavia, I was in a similar situation to the one I later found in the World Bank and the West. In both cases, the main idea is that we have a perfect system and it should not be questioned – in psychology it is called “system justification”, the need to defend approaches that justify the existence and correctness of the system.

But now there seems to be a change. There is much more research, there is much more debate in mainstream media, too. What happened? Was there a political change that allowed this transformation? It’s all tied to the success of Piketty?

It’s a combination of factors. Firstly, there has been a dramatic breakthrough in the science of economics. As I said earlier, economics has been mostly disregarding power relations and using the ‘”representative agent” as the centre of its theoretical framework – essentially ruling out any form of heterogeneity, and focussing instead on the average mean of the variable we want to study. Inequality, though, is by definition heterogeneous, you cannot have inequality if there are no differences. Now, however, we have an unprecedented access to data, and this allows for broader and more detailed studies that obviously also involve the study of inequality.

The second part of the answer, of course, is political – there are now strong political and social interests that are involved. Piketty is not an exogenous factor, he comes in the wake of those protests, that awareness by millions of people that there is a problem in income distribution. These two factors together, economic theory, and a tectonic movement of public opinion, are leading to a major change. So even the mainstream has to react to this new situation, institutions and think tanks cannot stand still in front of a phenomenon that’s so important, they cannot ignore it. Even the Peterson Institute for International Economics, which is funded by commercial banks in Washington, began to study, and quite seriously, the issue of inequality. Even at the World Bank it’s the same – up to five years ago, the term inequality was not very well regarded, while now there are more and more studies that deal with it.

We’ve talked about inequality in western countries, but let’s widen the perspective for a moment. Your new book is on globalization, and I saw that there is an extensive discussion on your data showing that in the last 30 years, the increases in income were almost completely absorbed by the famous top 1%, and by the so-called global middle class, composed mainly of Chinese and Indians workers who have seen their incomes soar; while the losers of globalization were mainly the middle class and the workers of the West. What considerations can we draw from this data?

We never have anything that is completely positive or negative, there are always trade-offs, someone gains and someone loses. What we can say is that in a global perspective it is possible that the ones who gain are more than those who lose; or that what is gained by the winners is more than what is lost by the losers, and therefore we can have a situation in which we have an overall positive result, where the average income increases.

Data show that globalization has undoubtedly been a major factor in this change in income distribution. Obviously, it is not the only factor, there is also technological change and policy. But also these two cannot be separated from globalization. Technological change – at first glance a neutral innovation – could not develop to full effect without globalization. The same, of course, can be said of policy: If we go back to what we discussed earlier, that the Socialists have changed their policies, we notice how strong was the pressure of globalization. Just think about a theme such as taxation: because of the ease of movement of capital, it was simply not possible to keep a high level of taxation and politics had to adapt to these structural changes. Similarly, labour policies in Germany have been dictated primarily by German capital, under the threat to relocate in the Czech Republic or Poland.

The most interesting aspects that we see globally are the three factors you mentioned: the growth of the so-called global middle class, especially in China; zero growth for the middle class of the developed countries; and finally, considerable gains for the richer part of the population. Is it a good thing? You can certainly say so, hundreds of millions of poor people are now less poor, while those who have lost the most, the western middle class, was already relatively well-off. But this would not be a satisfactory answer to western policy-makers, nor to workers who have lost so much in recent years.

What you say is interesting and true but it can also be used, and it is used, as a sort of validation of the correctness and justness of neoliberal policies; one of the recurrent mantra is that the policies of the Washington Consensus, after all, have worked just fine and contributed to the development of the South. In fact many of the gains in the so-called global middle class are recorded in China and India, and it is questionable that this success is the by-product of western policies, and not, instead, of those of the Chinese government, for example.

You can try to use this data to proclaim the success of neo-liberal policies but, in fact, China is a country that can hardly be classified as neo-liberal. Quite the opposite, in fact: the legal system is anything but transparent; corruption; monopolies; property rights are not well-defined; the public sector is still very large; and there are serious limitations to the freedom of movement of workers. The only thing in common between Chinese and neoliberal policies is the openness to international trade, but the institutional arrangements are completely different. Of course, these aspects are often silenced, because for the upper classes that have gained so much from globalization, it is useful to send a message about how these policies have helped above all the poorest. As I said, however, this may not be enough at the political level, because the elite must now confront a growing discontent. When Reagan or Thatcher built consensus for the neo-liberal turn, they did not do so explaining that these policies would enrich the poor Chinese while English and American workers would lose their jobs.

What, in your opinion, are the future prospects? There are some interesting and conflicting structural factors. On the one hand, the growth of wages in China may make it less convenient for capital to relocate, possibly slowing down the push toward more globalization. Furthermore, according to Professor (Charles) Goodhart, of the LSE, the main difference will be in the demographic trend. In the last 50 years we have had a population that has grown a lot and this led to excessive labour supply that has driven down wages. With the stabilization of the population, the trend in the ratio Capital-Labour is expected to reverse itself and so would inequality. At the same time, however, we are about to witness a new wave of technological advancement and with the imminent robotisation of many industries, there will be less and less demand for labour. What awaits us in the near future?

It is a difficult question. It is true that in China there is a demographic transition, the population will reach its peak in the next decade; in India, however, for example, the trend is different, and the apex of growth will be in at least half a century. At the same time we have a very rapid population growth in Africa. The peak of the population, according to some estimates, will be 11 billion people. In any case it is a very complex issue. Over the next two centuries, the population will probably stabilize and, with capital abundance, we can revert the present situation about inequality. It’s a reasonable assumption, but it is a very long-term perspective.

As for the technological revolution, I am not as pessimistic as many others. Every time there was a technological change, there have always been fears about possible mass unemployment, but it never happened. The problem is our ability to imagine – we only know the types of jobs that already exist, and not those possible in the future. We see robots taking already existing jobs and so we fear for our future, but we do not know how this future will be. To give you an example, when I came to the United States many years ago, my mother accompanied me, in particular during the war in Yugoslavia: she could not understand the jobs of the people I knew. She knew what a shoemaker was, or a doctor, but a hedge fund manager was something she could not initially understand. Now we have all types of jobs in IT, start-ups, things that did not exist even a few years ago.

So which trends do you see regarding globalization and inequality?

It is a topic I deal with in the last part of my book – I do not think that it is really possible to make accurate predictions. In general, when we make forecasts, we just take a number and consider it stable for next 20 years, but of course things change, and forecasts become useless. In general, however, what I see is that China’s role will probably be taken over by other countries (those where population growth is stronger), and this will mean a further wage convergence between rich and poor countries, at least over the next 50 years. In the West, however, this wage convergence will be a political problem because it will result in the absence of any real wage growth in developed countries. Inequality globally will come down, as is the case already now, especially because of the growth of some Asian countries, and some African nations – the between component will go down.

The within component, or the class component, if you prefer, of inequality, however, is bound to increase. Over the next two or three decades it is possible that there will be more and more national conflicts on the issue of globalization and income distribution.

And this of course brings us to the topic of the relationship between inequality and democracy. As you say, what we see in the West is wage stagnation and this may lead to unrest and class conflicts. You might even think that it is democracy itself that will be at risk: democracy means the same political rights and not equal income, but we know how economic power can distort the mechanisms of representation. Do you think this growing economic inequality could undermine western democracy?

What I think is most striking about the current situation is that, despite an economic crisis of unusual hardness, we have not seen any real and significant growth of anti-systemic movements. Even the Front National plays within a democratic framework. Perhaps rather Erdogan, in Turkey, and Putin, are closer to a political model that overcomes democracy, but for the moment this is not happening in western Europe. And I’m also sceptical about the ability of parties like the FN to live up to their campaign promises, starting from breaking down the European Union, for example. Of course, things might change – Brexit, for one thing, may open up an entirely new scenario.

What I think is that, in the coming years, there will be more tension between, on the one hand, the parties which want a populist response to the crisis – such as Trump, here in the US – and which oppose the waves of migration, globalization in general, favouring protection for domestic industries and beggar-thy-neighbour devaluation. And, on the other hand, plutocratic parties that, now more than ever, need to subvert the power of the poorest sectors of the population, who are growing in number – and this will lead to an increasingly central role of money in determining policy choices.

What is happening in the United States is very interesting: on the one hand we have Trump, bringing the weight of his personal fortune in politics, the perfect oligarch; on the other, however, the ideal candidate for the upper classes is Hillary Clinton, the true defender of the Establishment. So what will happen is that they will do everything possible for the workers, or blacks, or at least the economically disadvantaged, not to vote.

So, we have at the moment these two movements, one that keeps favouring globalisation and defends its advantages, especially for the top 5%, that may lead to the gradual transformation of democracy into plutocracy, and, to quote Gramsci, to re-establish the hegemony of this thinking and of these interests; and, on the other, the growth of movements of the anti-globalisation right-wing.

This is true in Europe and in the western world, while elsewhere the situation is different. In Latin America there is a return of the right, but I believe this is more a normal political cycle; we do not know what will happen in Asia – in India there is now an openly right-wing government, while in countries like China or Indonesia or Thailand, the division between classic left and right is much less pronounced than in the West.

The risks, however, are not just political. According to many economists, including Robert Reich, the economic crisis has been caused by inequality in income distribution. More generally, there is the risk of too weak demand because of an excessive concentration of income.

There are solutions, even though they are not easily achievable. For example, I think, because of globalization, as I said before, a higher taxation for the rich or for capital income is very difficult to implement – even if a country decided to raise taxes, even if we had dozens of countries doing so , there would always be other countries happy to offer lower taxation to accommodate capital flights.

The policies of the future, in my opinion, go in another direction, towards a more equitable distribution of endowments. If it is true, as Piketty says, that it is the ownership of capital that determines a higher income, it is in that field that we must intervene. I am referring, in particular, to education, ensuring more equitable economic returns for people with similar qualifications – differently from today where, for a given number of years in higher education, those who come out of Harvard have an expected income at least ten times higher than the graduates of less prestigious universities. Equalizing the quality of education would have a similar effect to the de-concentration of capital ownership.

At the same time, it would be important to reduce the concentration of physical capital, which is certainly more difficult – but not impossible. In the past, we had examples: employees’ stock ownership plans; co-determination in Germany, increasing the role of the trade unions in the boards; and trade union ownership of shares in Sweden. It is not easy, of course, but it seems to me much more viable than the other options present today.

This interview was conducted by Nicola Melloni. Branko Milanovic’s new book Global Inequality. A New Approach for the Age of Globalisation is out now.