Download Global inequality: A new approach for the age of globalization

Global inequality: A new approach for the age of globalization
A book talk
Branko Milanovic
May 1, 2016
The structure of the book
Chapter 1. Current globalization, mid‐1980s to today: The rise of the global middle class and global plutocrats
Real income growth at various percentiles of global income distribution, 1988‐2008 (in 2005 PPPs) Real PPP income change (in percent)
80
X “China’s middle class”
$PPP2
70
$PPP 180
60
$PPP4.5
$PPP12
50
40
30
20
Branko Milanovic
X
“US lower middle class”
10
0
0
20
40
60
80
100
Percentile of global income distribution
From twenty_years\final\summary_data
Estimated at mean‐over‐mean
Why we do it? Political implications
• The objective of the work on global inequality is not just a description of the changes but drawing lessons on their political implications
• Point A raises the issue of future political inclusion of the Chinese middle class
• Point B, of rich countries’ democracy in condition of income stagnation among many relatively poorer groups
• Point C, of global plutocracy
Branko Milanovic
cumulative real growth rate between 1988 and 2008
0
20
40
60
80
Global growth incidence curve, 1988‐2008 (by percentile)
mean growth
2
10
Usincg c…\twenty_years\dofiles\mygraphs
20
30
40
50
60
70
80
percentile of global income distribution
Branko Milanovic
90 95 100
Real income growth over 1988‐2008 and 1988‐2011 (based on 2011 PPPs)
Cumulative real per capita growth in % between 1988 and 2008
140
1988‐2011
120
100
80
1988‐2008
60
40
20
0
0
10
20
30
40
50
60
Percentile of global income distribution
Branko Milanovic
70
80
90
100
Global income distributions in 1988 and 2011
.8
Figure 3. Global income dstribution in 1988 and 2011
1988
50000
10000
3000
1000
300
0
.2
density
.4
.6
2011
Emerging global “middle class” between $3 and $16
log of annual PPP real income
twoway (kdensity loginc_11_11 [w=popu] if loginc_11_11>2 & year==1988, bwidth(0.14) title("Figure 3. Global income dstribution in 1988 and 2011")) (kdensity loginc_11_11 [w=popu] if loginc_11_11>2 & year==2011, bwidth(0.2)) , legend(off) xtitle(log of annual PPP real income) ytitle(density) text(0.78 2.5 "1988") text(0.65 3.5 "2011") xlabel(2.477"300" 3"1000" 3.477"3000" 4"10000" 4.699"50000", Branko Milanovic
labsize(small) angle(90))
Using Branko\Income_inequality\final11\combine88_08_11_new.dta
Chapter 2. Inequality within countries: introducing Kuznets waves (cycles) to explain long‐term trends in income inequality A1. Kuznets’ cycles in societies with a stagnant mean income
11
How do societies with stagnant mean income look like?
25000
Seven centuries of GDP per capita in Italy, 1300‐
2011
GDP per capita in 1990 PPPs
20000
15000
10000
5000
0
1300
1400
1500
1600
1700
1800
1900
2000
Year
Data provided by Giovanni Vecchi.
12
Cyclical nature of the Kuznets curve:
Land rental/wage ratio over the long-term in Spain, 1282-1842
140
120
Napoleonic
wars
Land rental/wage ratio
100
Wool and wine production, rising demand for land, commercial
society
80
Wars, decline of wool exports
60
Plague
40
20
1282
1294
1306
1318
1330
1342
1354
1366
1378
1390
1402
1414
1426
1438
1450
1462
1474
1486
1498
1510
1522
1534
1546
1558
1570
1582
1594
1606
1618
1630
1642
1654
1666
1678
1690
1702
1714
1726
1738
1750
1762
1774
1786
1798
1810
1822
1834
1846
0
From Prados de la Escosura & Alvarez-Nogal, “The rise and fall of Spain 800-1850”
13
Kuznets curve here? No. GDP per capita and rent‐wage ratio: Spain 1325‐1840
140
120
Lad rent/wage ratio
100
80
Land/wage…
60
40
20
0
0
10
20
30
40
50
60
70
80
90
100
GDP per capita (1859‐100)
From Prados de la Escosura & Alvarez‐Nogal, “The rise and fall of Spain 800‐1850”
14
Key idea & key difference between pre‐
industrial and industrial societies
• Kuznets cycles in pre‐industrial societies are visible only over time (since income is quasi fixed). They are mostly driven by non‐
economic changes: conquests, wars, epidemics.
• Link between Kuznets and Malthusian cycles in pre‐industrial societies; but Kuznets cycles are broader because they are not necessarily driven by demographic changes • Little room for large increases in inequality because the average income level was very low (recall the inequality extraction ratio: inequality is limited by the level of average income)
15
A2. Kuznets’ cycles in societies with a rising mean income
16
Kuznets waves defined
• Kuznets waves in modern societies are visible when plotted against income per capita. Inequality driven by technological innovation and structural transformation (two technological revolutions), globalization and politics and policies. But also wars.
• Cyclical movement of inequality: long Kuznets waves, often over fifty years • Kuznets saw just one curve. We now know there may be many more.
17
Malign and benign forces reducing inequality (downward portion of the Kuznets wave)
Malign
Societies with stagnant Idiosyncratic events: wars mean income
(though destruction), epidemics, civil conflict
Societies with a rising mean income
Benign
Cultural and ideological (e.g. Christianity?)
Wars (through destruction •Widespread education and higher taxation: War (reflecting changing returns)
and Welfare), civil conflict •Social pressure through politics (socialism, trade unions)
•Aging (demand for social protection)
•Low‐skill biased TC •Cultural and ideological (pay norms?)
18
Kuznets relationship for the UK, 1688‐2010
60
1867
1913
Gini of disposable per capita income
50
1688
40
2010
1993
30
1962
1978
20
10
0
0
5000
10000
15000
20000
25000
30000
GDP per capita (in 1990 international dollars; Maddison)
Source: Ginis: for 1688, 1759, 1801, and 1867 from social tables for England/UK (as reported in Milanovic, Lindert and Williamson); for 1880 and 1913, from Lindert and Williamson (1983, Table 2); from 1961 to 2010, official UK data (disposable income per capita) kindly calculated by Jonathan Cribb, Institute for Fiscal Studies. GDP per capita from Maddison project 2014 version.
US_and_uk.xls
19
Kuznets relationship for the United States, 1774‐2013
60
1860
1933
50
1929
Gini of disposable per capita income
1774
2013
40
1947
1979
30
20
10
0
0
5000
10000
15000
20000
25000
30000
35000
GDP per capita (in 1990 international dollars; Maddison)
Source: Ginis: 1774 and 1860 from social tables created by Lindert and Williamson (2013). 1929. Radner and Hinricks (1974); 1931 and 1933: Smolemsky amnd Plotnick (1992). GDP per capita from Maddison project 2014 version. From 1935 to 1950 from Goldsmith et al (1954); from US Census Bureau, Income, poverty and health insurance coverage in the United States (various issues); gross income data adjusted to reflect disposable income. 20
Kuznets relationship for Italy, 1861‐2010
60.0
1861
Gini of disposable per capita income
50.0
1945
40.0
2010
1962
30.0
1983
20.0
10.0
0.0
0
5000
10000
15000
20000
25000
GDP per capita in 1990 international dollars; Maddison)
21
Source: Ginis: from 1861 to 2008 from Brandolini and Vecchi (2011) and personalu communication; for 2010 from LIS. GDP per capita from Maddison project 2014 version
Kuznets waves look more dramatic in logs…
Kuznets relationship for the United States, 1774‐2013
60
1860
1933
50
Gini of disposable per capita income
1929
2013
1774
40
1947
1979
30
20
10
0
1000
10000
GDP per capita (in 1990 international dollars; Maddison)
100000
Kuznets relationship for the UK, 1688‐2010
60
1867
1913
Gini of disposable per capita income
50
1688
40
2010
1993
30
1962
1978
20
10
0
1000
10000
GDP per capita (in 1990 international dollars; Maddison)
100000
Downswing of Kuznets first cycle and upswing of the second Kuznets cycle in advanced economies
Level of maximum inequality (peak of Wave 1)
Gini points (year)
Level of minimum inequality (trough of Wave 1)
(year)
United States
51 (1933)
35 (1979)
50
UK
57 (1867)
27 (1978)
Spain
53 (1918)
Italy
Approximate Reduction in number of years inequality (Gini of downswing of points)
the Kuznets wave
GDP increased (how many times) during the downswing
The second Kuznets wave (increase in Gini points)
16
4
Strong (+8)
110
30
>4
Strong (+11)
31 (1985)
70
22
<5
Modest (+3)
51 (1851)
30 (1983)
120
21
<9
Strong (+5)
Japan
55 (1937)
31 (1981)
45
24
6
Modest (+1)
Netherlands
61 (1732)
21 (1982)
250
35
7
Modest(+2)
24
Average per decade real per capita growth and Gini change during the downward portion of the first Kuznets wave (the Great Levelling)
0
0
10
20
30
40
50
60
70
‐1
Average change in Gini points per decade
Netherlands 1732‐1982
‐2
‐3
Italy 1861‐1983
UK 1867‐1978
USA 1933‐1979
‐4
‐5
Japan 1937‐1981
‐6
‐7
Spain 1953‐1985 ‐8
Average real per capita growth rate per decade
25
What drives 1st Kuznets cycle down and 2nd Kuznets cycle up?
Downward portion of Kuznets 1
~1900 to 1980
Malign forces
(wars)
•Wars
•Hyperinflation (against creditors)
Benign forces
(economics, social,
demography)
•Social pressure through politics (socialism, trade unions)
•High taxation
•Widespread education
•Aging (demand for social protection)
Upward portion of Kuznets 2
1980‐?
•Movement of labor from manufacturing into heterogeneous services
•Rents from tech innovations
•Globalization •Technological change
•Free global movement of capital
•Policy changes (endogenous)
•TOP impossible to disentangle
26
Brazil, China’s inequality in the Kuznets framework
50
60
Brazil
40
Gini
China
0
5000
10000
15000
GDP per capita
twoway (scatter Giniall gdpppp if contcod=="CHN" & year>1960, connect(l) ylabel(40(10)60) xtitle(2000 6000 12000) ytitle(Gini) xtitle(year)) (scatter Giniall gdpppp if contcod=="BRA", connect(l) text(62 12000 "Brazil") text(48 12000 "China") legend(off))
Using gdppppreg5.dta
27
“Endogeneity” of World War I
• Domestic maldistribution of income => High profits and insufficient domestic demand => Foreign investment => Need to control territories where investments are made => Large armies • The same logic applied by each power leads to conflict
• “The actual practice has been for business men to secure the assistance of their governments in pushing for markets, investments, and concessions outside their own country, in competing with business men of other nations similarly supported by their governments, and in bringing diplomatic or political pressure to bear on the government or people of any weak country where their trading or other economic interests are threatened. It is this illicit and underhand use of foreign policy by private business interest which has converted economic internationalism into the peril it has shown to be. (Hobson, The evolution of modern capitalism: a study of machine production, pp. 492‐3)
From Thomas Hauner
Chapter 3. Inequality between countries: from Karl Marx to Frantz Fanon and back to Marx? La longue durée: Global inequality From Karl Marx to Frantz Fanon and back to Marx?
80
Location
Projections
Gini index
60
Location
40
Location
Location
20
Class
Class
Class
0
1850
2011
Branko Milanovic
2050
Issues of justice and politics
1. Citizenship rent
2. Is global equality of opportunity an objective to pursue?
3. Migration, citizenship and national welfare state
Branko Milanovic
Global inequality of opportunity
• Regressing (log) average incomes of 118 countries’ percentiles (11,800 data points) against country dummies “explains” 77% of variability of income percentiles
• Where you live is the most important determinant of your income; for 97% of people in the world: birth=citizenship.
• Citizenship rent or citizenship premium
Branko Milanovic
Is citizenship a rent?
• If most of our income is determined by citizenship, then there is little equality of opportunity globally and citizenship is a rent (unrelated to individual desert, effort)
• Key issue: Is global equality of opportunity something that we ought to be concerned or not?
• Does national self‐determination dispenses with the need to worry about GEO? Branko Milanovic
Rawls’ views on inter‐generational transmission of wealth
Group
Inter‐
generational
transmission of collectively acquired wealth
Argument
Policy
Family
Not acceptable
Or at least to be limited
Threatens equality of citizens
Moderate to very high inheritance
tax
Nation
Acceptable
Affirms national self‐
determination
(moral hazard)
International aid
Branko Milanovic
Migration: a different way to reduce global inequality and citizenship rent
• How to view development: Development is increased income for poor people regardless of where they are, in their countries of birth or elsewhere
• Migration and LDC growth thus become the two equivalent instruments for development
Branko Milanovic
Growing inter‐country income differences and migration: Key seven borders today
Branko Milanovic
The logic of the migration argument
• Population in rich countries enjoys the citizenship premium
• They are unwilling to share, and thus possibly reduce (at least “locally”) this premium with migrants
• Currently, the premium is full or 0 because citizenship is (broadly) a binary variable
• Introduce various levels of citizenship (tax discrimination of migrants; obligation to return; no family etc.) to reduce the premium
• This should make native population more acceptant of migrants
Branko Milanovic
Trade‐off between citizenship rights and extent of migration
Full citizen rights Seasonal workers (almost 0 rights)
0
* People who would like to migrate according to a world‐wide Gallup poll
13% of world population*
Branko Milanovic
Migration flow
Chapter 4. Global inequality in this century and the next Interaction of mean income convergence and Kuznets waves 1. Will convergence economics spread to Africa?
2. Evolution of income inequality in the US and China
3. Hollowing out of the Western middle classes: populism vs. plutocracy
4. Global reminder: capitalism the only existing social system
Branko Milanovic
Annual per capita after‐tax income in international dollars
US 2nd decile
5000
Chinese 8th urban decile
500
1988
From summary_data.xls
1993
1998
2003
2008
2011
.08
US and China’s growth at the same income level
(GDPpc in Maddison’s 1990 $PPP) 2011
1981
growth rate
.04
.06
China
.02
1941
USA
0
1800
0
2000
4000
6000
8000
GDP per capita in 1990 G-K dollars
10000
twoway (lowess growth gdpppp if contcod=="CHN" & year>1980) (lowess growth gdpppp if contcod=="USA" & gdpppp<9000, text(0.07 1980 "China") text(0.015 1950 "USA") legend(off) xtitle(GDP per capita in 1990 G‐K dollars) ytitle(growth rate))
Using Polity_Maddison_2013.dta
Difference in the combined (population‐weighted) growth rates of the large emerging economies (excluding China) and rich countries, 1951‐2014: -.1
percentage point growth rate gap
-.05
0
.05
.1
Since the mid 1980s rich economies have never grown faster than large emerging economies, even excluding China
1940
1960
1980
year
2000
2020
Large emerging economies are India, South Africa, Brazil, Indonesia and Vietnam. c:\branko\new_book\figures_chapter_4_5_book
Using gdppppreg5.dta
Branko Milanovic
The US “perfect storm”
• Rising share of capital income in total net income
• Unchanged or increased concentration of capital ownership (Gini is in excess of 85)
• Increased association between high capital and labor incomes (see the next slide; Atkinson and Lakner)
• Continued or increased homogamy (assortative mating): the process which goes on for some 30 years (Greenwood et al.)
• Continued or increasing ability of the rich to “buy” policies (Bartels, Page)
45
Gini coefficients of capital and labor income: US 1974‐2013
1.0
Capit
0.9
0.8
0.7
0.6
0.5
0.4
1970
Based on LIS data;
us87_13_revised.xls Labor
1975
1980
1985
1990
1995
2000
2005
2010
2015
Probability (in percent) of being in top 10% by capital (labor) income if a person is in top 1% by labor (capital) income
70
If in top 1% by labor income
60
If in top 1% by capital income
50
40
30
20
10
0
1980
Lakner and Atkinson (2015)
1990
2000
47
Stylized correlation between capital and labor income in history (across persons)
Correlation coeff.
“New capitalism”
Socialism
0
Classic capitalism
Capitalists begin to work; labor gets some K income
Policy responsiveness to the divergent preferences of the rich, middle class and the poor
From Martin Gilens, Affluence and Influence
49
The “plateaing ” of the urban Gini in China, 1981‐2014 Urban Gini in China: 1981‐2014 (based on official household surveys) 0.35
0.3
Urban Gini
0.25
0.2
0.15
0.1
14
13
12
11
9
10
8
7
6
5
4
3
2
1
99
2000
98
97
96
95
94
93
92
91
90
89
88
87
86
85
84
83
82
0
81
0.05
Year
Calculated from Chinese urban household surveys (published data)
50
Where are now China and the US?
Gini
First Kuznets wave
China 2013
Second Kuznets wave
United States 2013
GDP per capita
What might drive the 2nd Kuznets cycle down?
• Progressive political change (endogenous: political demand)
• Dissipation of innovation rents
• Low‐skilled biased technological progress (endogenous)
• Reduction of the skill premium as education expands further (but I am skeptical of its relevance)
• Global income convergence: Chinese wages catch up with American wages: the hollowing‐out process stops (but other poor countries on the horizon…)
52
Is this an optimistic or pessimistic theory of changes in income inequality?
• The question boils down to whether there are endogenous forces that would curb and check increase in income inequality under capitalism
• Such forces can be benign: political pressure and greater taxation, ideology, low‐skill biased technological change, greater supply of educated labor, aging population and demand for social services
• Or they can be malign: as they were in the run up to World War I where insufficient domestic demand led to the competition for control of colonies (imperialism) and ultimately war
• Such forces cannot be excluded today.
53
Chapter 5. What next? Ten short reflections on global inequality (here: only one) .6
The 21st century reduction of inequality should rely less om redistribution of current income and more on equalization of labor and capital endowments
disposable income Gini
.3
.4
.5
market Gini = disposable GIni
ISR
USA
GBR
TWN KOR
ESP GRC
ITA
AUS
CAN
JPN
LUX
IRL FRA
DEU
.2
NLDFIN
NOR
DNK
.3
.4
.5
market income Gini
.6
Policy implications (summarized) • Focus on deconcentration of asset ownership (ESOPs, special tax benefits for small investors) and equalization of returns to education (public education)
• Thus, focus on pre‐distribution and taxation of inheritance rather than increased redistribution of current income (i.e., working on equalization of stocks rather than on flows)
• European welfare state’s ability to combat increased inequality by “traditional tools” of taxes and transfers is limited by (i) increased ethnic and cultural heterogeneity and (ii) mobility of capital and high income earners
• Reform of political funding
• More diverse forms of citizenship (to allow for greater migration)
• Multilateral migration quotas
• Movement away from single‐minded pursuit of horizontal equality
Glossary of new terms
• “Elephant graph”
• Kuznets waves in pre‐modern and modern societies
• Malign and benign forces that reduce inequality
• Endogeneity of World War I
• Citizenship rent or premium
• Trade‐off between citizenship as a binary category and reduction of global inequality and poverty
• Focus on deconcentration of asset ownership