Changes in the global income distribution and their political consequences

Branko Milanovic

Oslo, August 2018

Branko Milanovic

Based on:

2

And forthcoming…

Capitalism, alone

Structure of the talk• Uniqueness of the current period: Capitalism rules alone + the

reemergence of Asia (bringing the distribution of economic activity within Eurasia to the way it looked around 1500)

• Emergence of the global “middle/median class” and shrinkage of national middle classes

• Political/philosophical issues brought up by looking at global, as opposed to only national, inequalities

• The past 25 years in the rich world

Long run

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1800 1850 1900 1950 2000 2050

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Estimated global income inequality over the past two centuries, 1820-2013 (using 2011 PPPs)

IR and the rise of the West

WW1 and the Great Depression

WW2 and US dominance

The rise of Asia

1820-1980 recalculation of Bourguignon-Morrisson; 1992-2013: Lakner and Milanovic with extensions

La longue durée: From Karl Marx to Frantz Fanon and back to Marx?

Branko Milanovic

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Location

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Forecast

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China's and India's GDP per capita as percent of British GDPpc from the Industrial Revolution to today (Indonesia vs. the Netherlands)

China

India

Indonesia

Resurgent Asia

Going beyond the averages: Convergence of Chinese incomes

China

USA

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1000 10000 100000Disposable per capita income in PPP dollars

US and Chinese income distributions around 2002

China

USA

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1000 10000 100000Disposable per capita income in PPP dollars

US and Chinese income distributions in 2013

chinausa.ppt

23% of Chinese population within US income range 70% of Chinese population within US income range

• In the long-run inequality is determined by the spread of the technological revolutions: the West in the 19th

century, Asia today

• In the medium-run global inequality is determined by:

•What happens to within-country income distributions?

• Is there a catching up of poor countries?

•Are mean incomes of populous & large countries (China, India) growing faster or slower that the rich world?

Branko Milanovic

Past twenty-five years in the world

The emergence of the “global middle/median class”

Branko Milanovictwoway (kdensity loginc_11_11 [w=popu] if loginc_11_11>2 & bin_year==1988, bwidth(0.14) title("Figure 3. Global income distribution in 1988 and 2011")) (kdensity loginc_11_11 [w=popu] if loginc_11_11>2 & bin_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", labsize(small) angle(90))Using Branko\Income_inequality\final11\combine88_08_11_new.dta

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sity

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log of annual PPP real income

Figure 3. Global income dstribution in 1988 and 2011

Emerging global “middle class” between $3 and $16

Real income growth at various percentiles of global income distribution, 1988-2008 (in 2005 PPPs)

From twenty_years\final\summary_data

X“US lower middle class”

X “China’s middle class”

Branko Milanovic

$PPP2

$PPP4.5 $PPP12

$PPP 180

Estimated at mean-over-mean

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Branko Milanovic

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Percentile of global income distribution

Real income growth over 1988-2008 and 1988-2011 (based on 2011 PPPs)

1988-2011

1988-2008

Branko Milanovic

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Global growth incidence curve, 2008-13 (preliminary)

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Asian median

rich countries' poor05

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kernel = epanechnikov, degree = 0, bandwidth = 3

in percent; Lakner-MIlanovic data

Cumulative quasi non-anonymous rate of growth 1988-2008

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in percent; Bourguignon-Morrisson data

Cumulative quasi non-anonymous rate of growth 1970-1992

There was no “elephant” in the previous (pre-globalization) period

Global political or philosophical implications

•Does global equality of opportunity matter? Is “citizenship rent” morally acceptable?

•What is the “optimal” global income distribution?

•Can something “good” (global middle class) be the result of something “bad” (shrinking of national middle classes and rising income inequality)? Are we back to Mandeville?

All countries with income data; year 2013; preliminary data (i.e. not a full sample of countries)

USA

India

Brazil

China

Russia

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Position of national income percentiles in global distribution

Quasi impossibility of having regressive transfers from very rich and egalitarian countries to very poor countries

Norway

Mali

Tanzania

Madagascar

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Using calcul11.do and fnal11.dta

The past twenty-five years in the rich world

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1980 1990 2000 2010 2020year

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1980 1990 2000 2010 2020year

UK

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Germany

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Canada

in percent

Income share of the middle four deciles 1980-2013

c:\branko\voter\dofils\define_variables using data_voter_checked.dta

Income stagnation and shrinkage in the size of the western middle classes

The middle class defined as population with income between +/-25% of national median income (all in per capita basis; disposable income; LIS data)

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Spain

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Finland

Percentage of population considered middle class in early 1980s and 2013

around 1980s 2013

Redistribution in face of rising market income inequality• It is neither globalization/technological change alone, nor is it only

redistribution policy (taxes, transfers)

• Essentially, policy failed to counteract the rising market income inequality, coming probably from globalization, technological change, deregulation (which is indeed a policy), monopolization, reinforcement of the elite power, etc. (topic of my Capitalism, alone)

Branko Milanovic

Data source: LIS Database

Market (“factor”) income and disposable household income, Ginis, non-elderly households – change, approx. 1985 to approx. 2013

Luxembourg Income Study;Janet Gornick

The headwinds of rising market income inequality

The role of economic policies in offsetting the increase in marketPincome inequality

Market income inclusive of state pensions (social security) considered as deferred wages. Calculated from LIS data

market1 income

gross income

disposable income

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USA 1969-2016

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disposable income

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Germany 1973-2015

Ginis of capital and labor income and quasi automatic transmission of rising capital share into greater inter-personal inequality

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Germany, 1984-2015

The end

5. Issues of justice and politics

1. Citizenship rent2. Migration and national welfare state3. Hollowing out of the rich countries’ middle classes

Branko Milanovic

Increased inequality of both labor and capital incomes

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Gini coefficients of capital and labor income: US 1974-2013

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1. Is citizenship a rent?

• If between 2/3 and ¾ of our lifetime 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? Rawls’ and statists’ point.•Migration is an attempt to “dilute” or share the

rent/premium => implication for migration policiesBranko Milanovic

2. Optimal global distribution: the Rawlsian world

•For Rawls, global optimum distribution of income is simply a sum of national optimal income distributions

•Why Rawlsian world will remain unequal?

Branko Milanovic

All equal Different (as now)

All equal

Different (as now)

Mean country incomes

Individual incomes within country

Global inequality in Real World, Rawlsian World, Convergence World…and Shangri-La World (Theil 0; year 2011)

77

54(all country Theils=0; all mean incomes as now)

23 (all mean incomes equalized; all country Ginis as now)

0

Branko Milanovic

3.Back to Mandeville

• Possible crowding out of national middle classes, and the creation of a global one

• But the middle class is presumably a force for stability when there is a political community. There is no political community at the global level. What does global middle class mean?

• Would global middle class create a global polity?

• Or, global plutocracy: in the longer-term, reversal to the pre World War I situation

• Can something that is bad nationally (increased inequality) be good globally (decreased inequality)?

• Can national vices produce global virtue?

Branko Milanovic

Extras

China

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All-China estimated Gini (1985-2015)

1985-2002 Wu and Perloff2003-2015 NSB official estimates

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Income inequality around year 2011 (household per capita income or NSS consumption)India

(another) Trilemma of globalization

• You cannot have (A) large differences in mean country incomes, (B) globalization and (C) no structural migration.

• If A + B as today then migration.

• If A + C then no globalization.

• If B + C then you have to have homogeneous countries like EU15.

• EU, because of significant East-West and North-South income differences is, in a very modest way, a replica of the world

• EU migration problems stem from moving, as result of enlargement, from B+C to B+A.

Trade-off between citizenship rights and extent of migration

Branko Milanovic

Full citizen rights

Seasonal workers (almost 0 rights)

Migration flow13% of world population*

0

* People who would like to migrate according to a world-wide Gallup poll

Why tools from the 20th century will not work?

• Education in quantitative sense will have much less of a “bang for a buck” and will not by itself reduce the skill premium

• Trade unions are on the decline because the nature of work, in service-oriented and globalized economy has changes

• Increases in taxation of current income are unlikely because the trust in the government is less

• New transfers cannot be financed; aging of the population and anti-migrant feelings further limit what can be done

• And one unlikely danger: more meritocratic capitalism where top wage earners are also top K earners (and the reverse)

What could possibly be done?

• Improved quality of education and much easier access to education for all—that is, investing for stronger public education rather than the opposite trend of ever stronger private education

• Deconcentraton of ownership and income from capital through the use of tax incentives; a long and arduous process

• Employee-stock ownership plans

• Higher taxation of inheritance (not current income)

• Change in the rules re. financing of political campaigns (especially in the United States)

Ok, what are the messages?

• Maintain globalization, but do not expect that it will help everybody

• Improve domestic redistribution precisely because globalization is not good for all

• Expect that the shift of relative economic power to Asia will continue

• Improve quality and access to education

• Broaden ownership of capital

• Tax inheritance

• Do not “kill” migration but make it politically more palatable (by reducing migrants’ rights)

• Realize that Europe is also part of the Greater Middle East

• Reform the funding of political parties and elections