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Financial Times, April 14, 2016
‘Global Inequality: A New Approach for the Age of Globalization’, by
Branko Milanovic
Review by Martin Wolf
Global Inequality: A New Approach for the Age of Globalization, by
Branko Milanovic, Harvard University Press, RRP£22.95/$29.95, 320 pages
Branko Milanovic has written an outstanding book. Global Inequality: A
New Approach for the Age of Globalization is informative, wide-ranging,
scholarly, imaginative and commendably brief. As you would expect from
one of the world’s leading experts on this topic, Milanovic has added
significantly to important recent works by Thomas Piketty, Anthony
Atkinson and François Bourguignon.
Compared with Piketty in Capital in the Twenty-First Century (2014),
Milanovic focuses more on global than on national inequality, and also
more on income than on wealth. His canvas is broader than that of
Atkinson in Inequality: What Can Be Done? (2015), which concentrates on
the UK and goes deeper into policy. The book closest to Global
Inequality is Bourguignon’s The Globalisation of Inequality (2015) —
unsurprisingly, perhaps, given that the two authors were colleagues at
the World Bank. Yet Milanovic’s approach is both more historical and
more political.
More
Milanovic, like Bourguignon, stresses one encouraging fact. While
inequality is rising within most countries, notably the high-income
ones, global inequality of incomes, though huge, has been falling,
particularly since 2000. Yet even that might not continue, once China’s
incomes per head rise above the global average, as will soon happen.
Prospects for further reductions in global inequality will then depend
on the rate of progress in other large developing economies, notably India.
Other conclusions are more disturbing. In particular, the influential
hypothesis of the Nobel Prize-winning economist Simon Kuznets (1901-85)
that development first increases inequality of incomes within countries,
then durably reduces it, has been disproved by events. Instead of such a
“Kuznets curve”, Milanovic advances the notion of “Kuznets waves”:
inequality rises, falls and then rises again, perhaps endlessly.
The author, now a senior scholar at the Luxembourg Income Study Center
in New York, is celebrated for a chart showing the proportional rise in
real incomes per head across the global income distribution between 1988
and 2008, which is updated here to 2011. Those at the very bottom have
done relatively poorly. The global middle classes have prospered: those
between the 45th and 65th global percentiles (from the bottom) doubled
their real incomes between 1988 and 2011. A high proportion of these are
Chinese. But those between the 80th and 95th percentiles have suffered
stagnant real incomes. These are the middle classes of the high-income
countries.
Finally, the global top one per cent has done far better than those
immediately below it, with real income increases of around 40 per cent.
This is a far broader group than the high-income countries’ top 1 per
cent: the top 12 per cent of Americans are in the global top 1 per cent,
as are the top 5 per cent of British people. The global top 1 per cent
receive about 29 per cent of all income and own about 46 per cent of all
wealth: inequality of the latter is always greater than the former.
For much of the 19th and 20th centuries, the rise in average incomes per
head in today’s high-income countries outpaced that in the rest of the
world. One’s position in the global distribution of income came
increasingly to depend not on what one did but on where one did it.
Milanovic calls this advantage of being British rather than, say, Kenyan
“citizenship rent”. In recent times, this rent has fallen, but only a
little. Today, one’s living standard depends a little more on what one
does and a little less on where one does it.
The overall picture, then, is one of modestly falling global inequality
and rising inequality within countries, notably high-income ones. Since
most politics is national, periods of rising inequality within countries
inevitably have political implications. Not least, Milanovic notes,
“very high inequality eventually becomes unsustainable”.
This partly explains the period of falling inequality within the
high-income countries that preceded the more recent increases in
inequality. During much of the 20th century, the middle and lower
classes of high-income countries benefited not only from the growth of
these economies, but also from marked reductions in the very high
inequality of the 19th century.
Yet it was not only benign forces — rising demand for labour, improved
education and the creation of welfare states — but also malign ones —
wars and depressions — that drove this mid-20th-century decline in
inequality. The malign forces, Milanovic stresses, were not accidents
but consequences of high inequality. Unequal societies are inclined to
be bellicose: world wars were an outcome. Similarly, the financial
development characteristic of unequal capitalist societies has tended
naturally towards crises.
The more recent rise in inequality in nearly all high-income countries
also has economic and political causes and consequences. Globalisation,
technological progress, the rising importance of finance and the
emergence of winner-takes-all markets are the economic forces.
Plutocracy then emerges and reinforces the tendency towards inequality.
Evidence from the US shows, for example, that politicians routinely
ignore the concerns of the lower- and middle-income groups.
It seems unlikely, argues Milanovic, that the forces driving rising
inequality inside nearly all economies will reverse in the foreseeable
future. On this, he is a little more optimistic about China than about
the US. As the growth of China’s labour force slows, real wages are
starting to rise strongly. Moreover, political pressures from below and
the need for a consumption-led economy might force the government to
shift incomes towards the middle and bottom.
In the case of the US and other high-income countries, the forces behind
rising inequality are powerful. The redistributive policies of the
mid-20th century would also now be difficult to implement because it is
harder to tax mobile capital and people. If the benign forces look weak,
what about the malign ones? In the high-income countries, we are
witnessing movements towards not only plutocracy but also nationalist
populism. Indeed, the two go together. We do not yet know how this will
end. Milanovic even asks whether democratic capitalism will endure.
If globalisation is making the world more equal and most countries,
especially the high-income ones, rather less so, should we regard this
as a beneficial development? Milanovic favours the cosmopolitan
yardstick: if the world’s poor and middle classes are doing relatively
well, that is good. At the same time, he is understandably concerned
about what is happening within high-income countries.
One argument for this is that globalisation might not be politically
sustainable. This applies particularly to migration. Free movement of
people may be viewed as a natural corollary of free movement of goods,
services and capital. In practice, the result is a reaction against
globalisation. The popularity of Donald Trump and Marine Le Pen shows
that the less successful will fight for their citizenship rent.
The era of globalisation has produced beneficial outcomes. But it has
also created huge challenges. If ever-rising inequality within countries
is to be avoided, redistribution of the income from capital, or of
wealth, seems to be an inescapable part of the answer. Is this
politically possible? Probably not — in which case, the political future
of the west looks bleak. Ever-rising inequality looks a highly unlikely
combination with any genuine democracy. It is to the credit of
Milanovic’s book that it brings out these dangers so clearly, along with
the important global successes of the past few decades.
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