Changesintheglobalincomedistribu3onandtheirpoli3calimplica3ons

BrankoMilanovicRome,June4,2018

BrankoMilanovic

Structure of the talk • Uniquenessofthecurrentperiod:Capitalismrulesalone+thereemergenceofAsia(bringingthedistribu3onofeconomicac3vitywithinEuroasiatothewayitlookedaround1500)

•  Inequalityandredistribu3oninrichandmiddleincomeeconomies•  “Elephantchart”andtheambivalenceofglobaliza3on• Greatestsupportforglobaliza3onintheSouth• UnlikelythatconvergenceofAsiawillstop• Disar3cula3onintheNorth=>threattoglobaliza3on• Migra3onasanexpressionofglobaliza3on=>policiesinfavorofcircularmigra3onandagainstbinarynatureofci3zenship

Long run

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1800 1850 1900 1950 2000 2050

Giniinde

x

Year

Es3matedglobalincomeinequalityoverthepasttwocenturies,1820-2013(using2011PPPs)

IRandtheriseoftheWest

WW1andtheGreatDepression

WW2andUSdominance

TheriseofAsia

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

BrankoMilanovic

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1850 2011 2050

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i ind

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Class

Forecast

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percen

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China'sandIndia'sGDPpercapitaaspercentofBri3shGDPpcfromtheIndustrialRevolu3ontotoday(Indonesiavs.theNetherlands)

China

India

Indonesia

ResurgentAsia

Past twenty-five years

The emergence of the “global middle class”…

BrankoMilanovictwoway(kdensityloginc_11_11[w=popu]ifloginc_11_11>2&bin_year==1988,bwidth(0.14)Ftle("Figure3.GlobalincomedistribuFonin1988and2011"))(kdensityloginc_11_11[w=popu]ifloginc_11_11>2&bin_year==2011,bwidth(0.2)),legend(off)xFtle(logofannualPPPrealincome)yFtle(density)text(0.782.5"1988")text(0.653.5"2011")xlabel(2.477"300"3"1000"3.477"3000"4"10000"4.699"50000",labsize(small)angle(90))UsingBranko\Income_inequality\final11\combine88_08_11_new.dta

1988

20110

.2.4

.6.8

dens

ity

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1000

3000

1000

0

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log of annual PPP real income

Figure 3. Global income dstribution in 1988 and 2011

Emergingglobal“middleclass”between$3and$16

2830

3234

1980 1990 2000 2010 2020year

USA

2830

3234

1980 1990 2000 2010 2020year

UK

2830

3234

1980 1990 2000 2010 2020year

Germany

2830

3234

1980 1990 2000 2010 2020

year

Canada

in percentIncome share of the middle four deciles 1980-2013

c:\branko\voter\dofils\define_variablesusingdata_voter_checked.dta

…andincomestagna3onandshrinkageinthesizeofthewesternmiddleclasses

Themiddleclassdefinedaspopula3onwithincomebetween+/-25%ofna3onalmedianincome(allinpercapitabasis;disposableincome;LISdata)

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USA

Spain

Canada*

Germany

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Netherlands

Finland

PercentageofpopulaFonconsideredmiddleclassinearly1980sand2013

around 2013

twoway(scaYermiddle_mi1pcyearifcontcod=="MEX"&decile==1&year>1979,connect(l)yFtle("")ylabel(20(2)28)xlabel(1980(10)2020))(scaYermiddle_mi1pcyearifcontcod=="BRA"&decile==1&year>1979,connect(l)yFtle("")ylabel(20(2)28)xlabel(1980(10)2020))(scaYermiddle_mi1pcyearifcontcod=="USA"&decile==1&year>1979,connect(l)yFtle("")ylabel(20(2)36)xlabel(1980(10)2020)legend(off)Ftle(Marketincomeshareofthefourmiddledeciles)text(302010"USA")text(272008"Mexico")text(262015"Brazil"))

USA

MexicoBrazil

2022

2426

2830

3234

36

1980 1990 2000 2010 2020year

Market income share of the four middle deciles

Redistribution in face of rising market income inequality

Datasource:LISDatabase

Market(“factor”)incomeanddisposablehouseholdincome,Ginis,non-elderlyhouseholds–change,approx.1985toapprox.2013

LuxembourgIncomeStudy;JanetGornick

market income

gross income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1970 1980 1990 2000 2010 2020year

USA 1969-2016

market income

gross income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1980 1990 2000 2010 2020year

Germany 1973-2015

Theroleofeconomicpoliciesinoffseqngtheincreaseinmarketincomeinequality

China and India

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1985 1990 1995 2000 2005 2010 2015

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All-ChinaesFmatedGini(1985-2015)

1985-2002WuandPerloff2003-2015NSBofficiales3mates

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67

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IndiaNSS Russia USA China Brazil India SouthAfrica

Ginipoints

Incomeinequalityaroundyear2011(householdpercapitaincomeorNSSconsump3on)

The elephant graph

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

Fromtwenty_years\final\summary_data

X“USlowermiddleclass”

X“China’smiddleclass”

BrankoMilanovic

$PPP2

$PPP4.5 $PPP12

$PPP180

Es3matedatmean-over-mean

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PercenFleofglobalincomedistribuFon

BrankoMilanovic

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Cumula3

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Percen3leofglobalincomedistribu3on

Realincomegrowthover1988-2008and1988-2011(basedon2011PPPs)

1988-2011

1988-2008

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Meanandmedianannualgrowthrateofglobalpercapitaincome

Data2011_and_08_11.xlsinc:/…twenty-five

Medianglobalincome

MeanglobalincomefromHHsurveys

WorldGDPpercapita

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88 a

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1 10 30 50 70 90percentile of global income distribution

Thailand vs USA

Deciles2,3,5and10attheiroriginal(1988)globalincomeposi3ons

Cumula3verealgrowthrates(1988-2011)ofthesamedecilesinThailandandtheUSA,pinnedattheiroriginal1988posi3onsinglobalincomedistribu3on

Calcul88_11.do(part“Howhavedifferentdeciles..”using:\Branko\Income_inequality\twenty_five\data\combine88_11_deciles.dta

Asian median

rich countries' poor050

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grow

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kernel = epanechnikov, degree = 0, bandwidth = 3

in percent; Lakner-MIlanovic dataCumulative quasi non-anonymous rate of growth 1988-2008

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kernel = epanechnikov, degree = 0, bandwidth = .8

in percent; Bourguignon-Morrisson dataCumulative quasi non-anonymous rate of growth 1970-1992

Therewasno“elephant”intheprevious(pre-globaliza3on)period

But large income differences between counties remain and they fuel migration

Allcountrieswithincomedata;year2013;preliminarydata(i.e.notafullsampleofcountries)

USA

India

Brazil

China

Russia

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Position of national income percentiles in global distribution

Netherlands

Madagascar

Mali

Tanzania

Guinea

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perc

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Migration

(another) Trilemma of globalization

•  Youcannothave(A)largedifferencesinmeancountryincomes,(B)globaliza3onand(C)nosystema3cmigra3on.

•  IfA+Bastodaythenmigra3on.•  IfA+Cthennoglobaliza3on.•  IfB+CthenyouhavetohavehomogeneouscountrieslikeEU15.•  EU,becauseofsignificantEast-WestandNorth-Southincomedifferencesis,inaverymodestway,areplicaoftheworld

•  EUmigra3onproblemsstemfrommoving,asresultofenlargement,fromB+CtoB+A.

Trade-off between citizenship rights and extent of migration

BrankoMilanovic

Fullci3zenrights

Seasonalworkers(almost0rights)

Migra3onflow13%ofworldpopula3on*

0

*Peoplewhowouldliketomigrateaccordingtoaworld-wideGalluppoll

Inequality reduction policies for the rich countries

Why tools from the 20th century will not work?

•  Educa3oninquan3ta3vesensewillhavemuchlessofa“bangforabuck”andwillnotbyitselfreducetheskillpremium

•  Tradeunionsareonthedeclinebecausethenatureofwork,inservice-orientedandglobalizedeconomyhaschanges

•  Increasesintaxa3onofcurrentincomeareunlikelybecausethetrustinthegovernmentisless

• Newtransferscannotbefinanced;agingofthepopula3onandan3-migrantfeelingsfurtherlimitwhatcanbedone

• Andoneunlikelydanger:moremeritocra3ccapitalismwheretopwageearnersarealsotopKearners(andthereverse)

What could possibly be done?

•  Improvedqualityofeduca3onandmucheasieraccesstoeduca3onforall—thatis,inves3ngforstrongerpubliceduca3onratherthantheoppositetrendofeverstrongerprivateeduca3on

• Deconcentratonofownershipandincomefromcapitalthroughtheuseoftaxincen3ves;alongandarduousprocess

•  Employee-stockownershipplans• Highertaxa3onofinheritance(notcurrentincome)• Changeintherulesre.financingofpoli3calcampaigns(especiallyintheUnitedStates)

0,60

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IRL

GBR

DEU

ESP

USA

FRA

ITA

CAN

AUS

FIN

NLD

DNK

JPN

NOR

TWN

KOR

Giniofhouseholdpercapitalaborincomearound2013

US_87_13_datarevised.xls

Ginis of K and L income in the US and the UK

0,4

0,5

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1,0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Ginicoefficientsofcapitalandlaborincome:US1974-2013

Capital

Labor

0,4

0,5

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0,8

0,9

1,0

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Ginicoe

fficien

tYear

UKincomeinequality1969-2013

Capitalincome

Laborincome

Redistribution: USA, Germany and Mexico

Fromvoter/..define_variables 35

7479

86 91 94 9704

7

1013

16

73

7883

8489

94

04 710

1315

84 89 92 9496980

00810 12Mexico

USA

GermanyDashed line: 1 Gini pt redustributionfor 1 Gini pt increase in market Gini

0.0

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.15

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5

Gin

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arke

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.4 .45 .5 .55 .6Gini of market income

Market income inequality and redistribution

Market, gross and disposable income Ginis in the US and Germany

BrankoMilanovicDefine_variables.dousingdata_voter_checked.dta

market income

gross income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1970 1980 1990 2000 2010 2020year

USA 1969-2016

market income

gross income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1970 1980 1990 2000 2010 2020year

Germany 1973-2015

market income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1980 1990 2000 2010 2020year

Italy 1986-2014

market income

disposable income

.25

.3.3

5.4

.45

.5.5

5G

ini

1980 1990 2000 2010 2020year

Germany 1981-2015

Ok, what are the messages? • Maintainglobaliza3on,butdonotexpectthatitwillhelpeverybody•  Improvedomes3credistribu3onpreciselybecauseglobaliza3onisnotgoodforall

•  Expectthattheshiyofrela3veeconomicpowertoAsiawillcon3nue•  Improvequalityandaccesstoeduca3on• Broadenownershipofcapital•  Taxinheritance• Donot“kill”migra3onbutmakeitpoli3callymorepalatable(byreducingmigrants’rights)

• RealizethatEuropeisalsoapartoftheGreaterMiddleEast• Reformthefundingofpoli3calpar3esandelec3ons