Inequality: The Global View

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"Inequality: The Global View"

Ed. note: This is the first post in a TP Ideas symposium on Branko Milanovic’s The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. The second installment is here and the third is here.

There are a number of different ways to think about inequality.  One is to look at inequality among members of a particular nation–say, the United States.  That is the way we are most used to thinking about inequality.  Another way is to look at inequality among the nations of the world–how much do average incomes vary across countries and how much is this relationship changing?  Still another is to look at inequality among all individuals in the world, irrespective of country.

In Branko Milanovic’s terrific book, The Haves and the Have Nots: A Brief and Idiosyncratic History of Global Inequality, he provides the raw materials for thinking about all these aspects of inequality and how they have varied across time and space.  Milanovic is lead economist with the World Bank’s research division and one of the world’s leading experts on inequality; his depth of knowledge on this subject is nothing short of magisterial.  Here are some of the key findings in his book:

Start with inequality among people in a nation.  The way this is typically measured is with the Gini coefficient which, in essence, compares the income of  every person in a nation to every other person in that nation and summarizes these relationships.  Put on a 0-100 point scale, the lowest score, 0 gini points, means a society where everyone receives the same income (perfect equality) and 100 points means all the income of the nation is received by one person (perfect inequality).  As originally theorized by economist Simon Kuznets, the conventional expectation has been that as societies developed they went through a necessary period of high inequality during the transition from agriculture to industry, followed by a period of decreasing inequality facilitated by state redistribution and public services like education.  That expectation has been confounded however by the last quarter century when inequality has risen substantially in most advanced societies, particularly the United States.  Right now, the US gini sits in the mid to high 40’s, which would be good for a Latin American nation, but is quite poor for a developed nation.

Inequality between nations is a less familiar story.  Here too developments do not comport well with conventional economic theory.  According to neoclassical theory globalization should have resulted in decreasing inter-country inequality over time as capital flows to low wage countries seeking profits and these same countries appropriate advanced technology produced elsewhere without paying the costs of technology development.  But that has not happened: through periods of globalization and deglobalization, inequality between countries has increased steadily since the industrial revolution and is now at an all-time high.

This development has many interesting implications and Milanovic explores them in a fascinating series of vignettes that accompany his main essay on the evolution of inter-country inequality.  In one vignette he points out that, when Marx was writing in the mid-19th century about the polarization of classes under capitalism, there was considerable power to writing about this inequality as the fundamental dynamic in the world.  There were only relatively modest differences in GDP per capita across nations and very high inequality almost everywhere including, of course, industrializing capitalist nations like Germany and England as well as poorer nations.  Therefore the future looked like a continuous process of class polarization within all nations as capitalism developed.

But just as Marx was putting the finishing touches on Das Kapital, the situation changed.  The industrializing nations started becoming much richer, leading to rises in wages and living standards that left the poorer nations of the world behind.  The rise in inequality between nations has led to the current situation where some 80 percent of global inequality is traceable to location (what country you live in) rather than class (your position in your country’s class structure).  One does wonder what Marx would write if he was writing today.

How big are these locational differences?  In another vignette, Milanovic points out that if you take the income distribution of each nation and divide it into twentieths — that is, 5 percent of the population in each ventile going from the poorest to the richest — the lowest 5 percent of the US population has a higher per capita income than 68 percent of the world’s population.  Even more amazing, the poorest 5 percent of the US population has the same per capita income as the richest 5 percent of the population in India.

In yet another vignette, Milanovic asks “How much of your income is determined at birth?”  The answer: 80 percent of your income can be accounted for by the country of your birth and the income level of your parents.  That leaves just 20 percent for age, sex, race, luck and, of course, hard work.  Wow.

In the final section of his book, Milanovic looks at global inequality in the broadest possible context—the level of inequality among all individuals in the world, irrespective of nation.  These levels are very high.  The world gini is around 70, higher than even such profoundly unequal societies as Brazil and South Africa which are “only” around 60.  Given such a high level, it is perhaps not a surprise that, according to Milanovic, the bottom 77 percent of the world’s population receives only 20 percent of the world’s income.  At the other end, the richest 1.75 percent of the world’s population also receives 20 percent of the world’s income, as does the next richest 3.6 percent.  So a little more than 5 percent of the world’s population receives 40 percent of total world income.  Now that’s inequality!

According to Milanovic, we are now at a high point in terms of global inequality, reflecting the fact that global inequality has been going up fairly steadily since the industrial revolution.  But there is some good news: while we are at a very high level of global inequality, the last twenty years has seen little change in that level.  That holds true despite an increase in inequality in most rich countries and despite an increase in the gap between most rich and poor countries.  The reason: India and China.  Their high growth rates have lifted hundreds of millions out of poverty, thereby keeping global inequality in check despite the other trends.

What does the future hold for global inequality?  Can China and India keep up their high growth rates?  Can more poor countries move along the same high growth path that China and India have followed?  Can rich countries like ours stop the ongoing rise in inequality and perhaps even start reducing it?  There are a lot of questions here and they all need answers.  Milanovic’s book is an excellent and factual place to start this very important conversation.

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