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
30
35
40
45
50
55
60
65
70
75
80
1800 1850 1900 1950 2000 2050
Gin
i in
dex
Year
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
0
20
40
60
80
1850 2011 2050
Gin
i in
dex
Class
Location
Location
Class
Location
Location
Class
Forecast
0
5
10
15
20
25
30
35
40
45
50
1800 1850 1900 1950 2000 2050
per
cen
t
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
0.5
11
.5
1000 10000 100000Disposable per capita income in PPP dollars
US and Chinese income distributions around 2002
China
USA
0.5
11
.5
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
1988
20110
.2.4
.6.8
den
sity
300
100
0
300
0
100
00
500
00
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
0
10
20
30
40
50
60
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80
0 20 40 60 80 100
Re
al P
PP
inco
me
ch
ange
(in
pe
rce
nt)
Percentile of global income distribution
Branko Milanovic
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0 10 20 30 40 50 60 70 80 90 100
Cu
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lati
ve r
eal p
er c
apit
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ow
th in
% b
etw
een
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88
an
d 2
00
8
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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-10,0
0,0
10,0
20,0
30,0
40,0
50,0
0 10 20 30 40 50 60 70 80 90 100
An
nu
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ate
(%)
of
real
PP
P in
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e
Percentile of global income distribution
Global growth incidence curve, 2008-13 (preliminary)
g08_13
Asian median
rich countries' poor05
01
00
150
200
cu
mula
tive
gro
wth
0 20 40 60 80 1001988 percentile
kernel = epanechnikov, degree = 0, bandwidth = 3
in percent; Lakner-MIlanovic data
Cumulative quasi non-anonymous rate of growth 1988-2008
05
01
00
150
200
cu
mula
tive
gro
wth
0 5 10 15 201970 ventile
kernel = epanechnikov, degree = 0, bandwidth = .8
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
11
02
03
04
05
06
07
08
09
01
00
perc
en
tile
of
glo
bal in
com
e d
istr
ibution
1 20 40 60 80 100percentile of country distribution
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
110
20
30
40
50
60
70
80
90
10
0
pe
rcen
tile
of w
orld
incom
e d
istr
ibutio
n
1 20 40 60 80 100country percentile
Using calcul11.do and fnal11.dta
The past twenty-five years in the rich world
28
30
32
34
1980 1990 2000 2010 2020year
USA
28
30
32
34
1980 1990 2000 2010 2020year
UK
28
30
32
34
1980 1990 2000 2010 2020year
Germany
28
30
32
34
1980 1990 2000 2010 2020year
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)
27
30
35
37
33
42
43
32
34
36
40
40
45
50
0 10 20 30 40 50 60
USA
Spain
Canada *
Germany
UK
Netherlands
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
.25
.3.3
5.4
.45
.5
Gin
i
1970 1980 1990 2000 2010 2020year
USA 1969-2016
market1 income
gross income
disposable income
.25
.3.3
5.4
.45
.5
Gin
i
1980 1990 2000 2010 2020year
Germany 1973-2015
Ginis of capital and labor income and quasi automatic transmission of rising capital share into greater inter-personal inequality
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1970 1980 1990 2000 2010 2020
Capital
Labor
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1970 1980 1990 2000 2010 2020
Gin
i co
effi
cien
t
Year
Capital
Labor
USA, 1974-2016 UK, 1979-2013
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1970 1980 1990 2000 2010 2020
Gin
i co
effi
cien
t
Year
Capital
Labor
Norway, 1979-2013
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1980 1985 1990 1995 2000 2005 2010 2015 2020
Gin
i co
effi
cien
tYear
Capital
Labor
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
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1970 1980 1990 2000 2010 2020
Gini coefficients of capital and labor income: US 1974-2013
Capital
Labor
0,4
0,5
0,6
0,7
0,8
0,9
1,0
1960 1970 1980 1990 2000 2010 2020
Gin
i co
effi
cien
tYear
UK income inequality 1969-2013
Capital
Labor
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
0,00
0,10
0,20
0,30
0,40
0,50
0,60
1985 1990 1995 2000 2005 2010 2015
Gin
i
All-China estimated Gini (1985-2015)
1985-2002 Wu and Perloff2003-2015 NSB official estimates
36
42
48 48 5051
67
0
10
20
30
40
50
60
70
India NSS Russia USA China Brazil India South Africa
Gin
i po
ints
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