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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