Q&A: Branko Milanovic on Globalization and Inequality

May 5, 2016

Milanovic recently spoke with the GC about inequality and globalization, including why the latter "should neither be worshipped nor vilified - it is not going to transform the world into a world of plenty or a conflict-free Arcadia."

Branko Milanovic's new book Global Inequality: A New Approach for the Age of Globalization (Harvard University Press) has been greeted with dazzling reviews - from The Financial Times ("informative, wide-ranging, scholarly, imaginative, and commendably brief") to The Economist ("Milanovic's bold theorizing chips away at tired economic orthodoxies").

On Wednesday, May 11, he will join his LIS Center colleagues Paul Krugman and Janet Gornick for "Globalization and Inequality," a discussion about the complex relationship between these large-scale economic trends.

Milanovic recently spoke with the GC about the intricacies and challenges of the topics at hand, including why globalization "should neither be worshipped nor vilified - it is not going to transform the world into a world of plenty or a conflict-free Arcadia."

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GC: Your book highlights an intriguing paradox: Even as inequality has soared within nations, it has fallen dramatically among nations. Generally, what factors would reduce global inequality even further?

Milanovic: The most important factor that reduced global inequality was fast growth of China and several other Asian economies. More recently India's role, with its high growth rates and relatively poor but numerous population, has become crucial. So the continued process of convergence between the West (the rich countries) and Asia is key for the reduction of global inequality.

When we say 'convergence,' we have in mind that the growth rates of per capita income are higher in poorer countries (that is, most of Asia and Africa) that in rich countries like the U.S. or Germany.

But note that this condition is satisfied in crisis situations, like now - that is, in the period after 2008 when the growth rates of most rich countries were very low or even zero. So sometimes developments that are negative for one part of the world population also produce lower global inequality.

It is also important to note that lower levels of inequality in individual countries do decrease global inequality; however, the effect is relatively small, compared with that of accelerating growth in poor and populous countries. This is why we face the apparent paradox to which you allude in your question: that during the past quarter century, inequality went up in most countries, yet global inequality was constant or even most recently on the decline.

You note that a reversal of the forces driving inequality is unlikely in most economies, at least for the foreseeable future. You have a more optimistic outlook on China than on the U.S., however. Why?

I am somewhat more optimistic about China's ability to reduce inequality than the U.S. for two reasons. First, China is a much poorer country that has developed very quickly and is currently coming to the end of a period of almost infinite supply of cheap labor. That means that the wages of low-skilled workers may be expected to rise substantially, and thus the gap between the highest and lowest paid workers will decrease.

Second, I think that redistributive transfers - which are currently very small in China, and include mostly state-sector workers - will become more widespread as China becomes rich. This too would tend to lower inequality. Clearly, neither of these two factors applies to the United States.

In the United States, on the other hand, I think that we are faced with an usual combination of forces that all push inequality up. These include: the rising importance of income from capital that is heavily concentrated in the hands of the rich; the tendency of the well-educated and rich to marry each other; an ever-rising probability of the same people having high incomes from both capital and labor (which increases inequality); and the political power of the rich, which allows them to influence the rules of the game in their favor.

In the high-income countries, plutocracy and populism seem to be rising in tandem. What might this mean for democratic capitalism?

Yes, interestingly, both are rising. In the U.S., commentators are obviously more focused on Donald Trump who advocates very clear populist and anti-globalization policies.

But very similar movements or parties exist in numerous European countries, from Denmark to Greece. These movements are often xenophobic and while they may be in favor of an extensive welfare state they would prefer to limit it to the native (country-born) population. Like Trump, they also take a very dim view of globalization, especially of various free trade treaties that are currently being negotiated.

I do not think that the leaders of these movements (including Trump) would be able, even if elected, to implement policies that they advocate now and that they find to be successful vote-getters, but I fear these movements may be sufficiently influential to push the mainstream parties in that direction. Fearful of losing votes, the mainstream parties are adopting populist right-wing policies that were originally defined and promoted by anti-systemic (fringe) parties.

On the other hand, the rise of Bernie Sanders, Podemos in Spain, and Syriza in Greece does show that left-wing policies, after a long time, find a strong support among the electorate, and especially so among the young whose (approximately) one-half of active life has been spent under the shadow of the crisis and high unemployment. Thus, the crisis has also produced a more reasonable response, rather than just populism and retrenchment into one's own fortress.

If globalization is making the world more equal but most countries, especially high-income ones, less equal, should it be viewed as a positive development?

This is the most difficult question. In addition to the decline in global inequality, one should not forget that globalization has also coincided with a huge reduction in global poverty. I say 'coincided' because it may be wrong to attribute causality to globalization, especially since more than 90 percent of global poverty reduction was, until the most recent period, due to one country only: China.

I think, and it is one of the key themes of my book, that globalization should neither be worshipped nor vilified. It is not going to transform the world into a world of plenty or a conflict-free Arcadia. Nor will it make everybody jobless.

It has and will continue to have both positive and negative facets. One such Janus-like feature is the one you mention in your question.

But there may be others: robotics may render many of the jobs that currently exist redundant, but it may also give us more leisure time.

So, in the case of globalization, as in all such huge world-changing forces, we have to be aware of both positives and negatives, and so long as one believes that the former are perhaps more important we should see globalization as a force for good.

It is useful to remember that similar, but much sharper, conflicts characterized early stages of development when industry displaced craft production, making many skills redundant and obliging workers to look for jobs in cities and work in factories under often inhumane conditions. But people politically fought against such conditions, and gradually the worst excesses were eliminated. It would be hard to argue, from today's vantage point, that the world would have been better off had industrialization - not only in England and the U.S., but in Egypt or China - never happened.

Milanovic, a preeminent scholar on income inequality who joined the GC as Visiting Presidential Professor and Senior Scholar at the LIS Center, previously served as Lead Economist in the World Bank's research department.