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Inequality in a converging world

Luis Guirola, PhD student in Political Science at Duke University;

Branko MILANOVIC. Global Inequality: A New Approach for the Age of Globalization, Cambridge: Harvard University Press, 2016.

One often hears that globalisation has brought with it unprecedented levels of inequality. What truth is there in this statement? The answer depends on whether we think about inequality between countries, local inequality (among people within each country) or global inequality (among people from across every country). Branko Milanovic looks at these three perspectives in his latest book, Global Inequality: A New Approach for the Age of Globalization, in which he presents his research into the changes of the global distribution of income over the last three decades to the general public.

1. The inequality of global income

The first point is the change in the distribution of global income. To look at this evolution, Milanovic divides the world population into income groups and matches their position on this distribution with the change in their income since 1988. This enables us to see which income groups have improved over the last few decades and to respond to whether there is greater or lesser equality: if the rich have become richer and those who had less have become poorer, the world will have become less equalitarian.

Milanovic focuses on three groups, which are those that show the greatest differentiation due to the change of their economic situation, calculated in keeping with the annual income per home and per person, which is obtained by dividing the income of the household between the number of people living in it, including any children. For example, a family with one child in which the parents earn $60,000 a year each will have an income per home and per person of $40,000 a year. This operation avoids the children, who do not have any income, from figuring as being artificially poor (despite benefiting from their parents’ income) and the parents from being artificially rich, despite sharing their income with the rest of the household.

First, those who have earned less are the middle classes of industrialised countries. Their income has hardly grown at all. They are people who, from a worldwide perspective, are relatively rich, they earn between $5,000 and $10,000 a year per home and per person. This is approximately the median income in Spain (7,500), more than double that of Mexico (2,900) and three times that of China (1,800). In second place, what we could call the world’s economic elite have improved their income by some 60%. This is the richest 1% and includes oligarchs and millionaires, but it also includes anybody with an income of more than $40,000 a year. The third group is made up of the emerging middle classes, given this name because they are found in the intermediate part of the distribution. This individual is a middle-class person from a country such as China or India, with an income of between $1,000 and $2,000 a year. Although, when compared with people living in industrialised countries, they are relatively poor, their income has improved by up to 80% and, therefore, they are the main winners in the process.

With this data, it is possible to explain the concern about the increase in inequality. Although the group of middle classes in industrialised countries has barely improved, it has not got any worse —neither this group, nor any other group. If we adjust to the world level, global inequality has not increased because the improvement of the emerging middle classes has easily compensated for the earnings of the richest 1%. (As you will see, a different diagnostic can be reached in the case of internal inequality). Thanks to this dramatic change, inequality in worldwide income is now at the lowest level since the Industrial Revolution.

2. More rich countries

According to Milanovic, the inequality between people can be broken down into two parts: one due to the income of the country in which they live, and another due to the position they occupy in each country. Of all the inequality, approximately a third of it corresponds to interior inequality and the other two thirds to inequality across countries.

Milanovic calls the earnings derived from living in a rich country the citizenship premium, which explains many international phenomena, of which perhaps the most notable is that of international migrations. However, what determines the evolution of the citizenship premium? Why are some countries rich and others not? Has it always been this way? Throughout most of history, the differences between countries were modest. The demographic behaviour of preindustrial societies was such that increases in production were translated into proportional increases in the population. As a result of this, the standard of living hardly increased over time and most of the population lived at barely more than a subsistence level, meaning that most countries had similar income per capita.

International equality broke down with the Industrial Revolution, when the pace of innovation in some countries overtook that of demographic growth and, as a result of this, they became richer and grew apart from the others. This situation has characterised the world until recent times. However, in the last few decades, several countries have moved out of the Third World and have become emerging countries, including some of the most highly populated countries on earth, such as China or India, and have started to converge with industrialised countries.

3. Inequality and development

Frequently, discussions on the growth of countries are parallel to those concerning inequality. Does economic growth lead to a more equalitarian society? Do the rich and the poor benefit from prosperity under the same terms? To observe the connection between equality and growth, Milanovic organises his discussion on inequality around the Kuznets curve.

Simon Kuznets, a Nobel prize winner in economic sciences, suggested that, although in the initial phase of industrialisation inequality would increase, with long-term development, income would flow to the middle classes and the growth would result in greater equality. This seemed to be a reasonable description in the mid-20th century when Kuznets formulated it, but not today, at least not in view of the last thirty years, because the upper classes have improved their situation notably in an overall way, but this is not the case of the middle classes in developed countries and, therefore, local inequality has increased.

To explain this change in the relationship between growth and inequality, economic literature has mainly focused on two evolutions: technological change and the opening up of the economy (globalisation). Technology generates inequality because it has made automated employment disappear, in other words, jobs that can be replaced by machines or computers. Automated employments include that of secretaries and many industrial jobs. On the other hand, those that involve problem-solving that cannot be specifically anticipated and that require a certain degree of creativity are not automated. Creativity does not mean that these jobs are necessarily of an intellectual nature. Accounting, looking after the elderly, taking animals for walks or serving at table are all creative activities.

At the same time, as the economy has become globalised, it is simpler for companies to import goods instead of manufacturing them locally. Employees who are most protected from external competition are those in the services sector and those for whom there is no skilled labour, a propitious business environment or infrastructure in other countries.

In perspective, both globalisation and technology are heading in the same direction: towards the replacement of jobs with intermediate remuneration, particularly in the industrial sector, by machines or foreign workers. Historically, industry represented an entry ticket to the middle class for low skilled workers and therefore, the disappearance of this kind of job has turned into a polarisation of the occupations and an increase of inequality.

This diagnosis is worrying because, by suggesting that the increase of inequality is a direct effect of forces —technological improvements and the international division of labour— that are associated to economic growth, it indicates that we are at a new section on the Kuznets curve in which growth would not run on a par with greater equality, which leads Milanovic to talk about Kuznets waves: a return to the section in which the relationship between growth and equality is negative.

Not all countries have undergone the same evolution. The previous explanations were developed by focusing on English-speaking countries. In addition, not all countries are exposed to the same forces and if they sometimes are, they have mechanisms to counteract them. The reader may be wondering about the case of Spain. Julio Carabaña recently published what is probably the most comprehensive synthesis available (Carabaña 2016, Ricos y pobres, Ed. Catarata), in which he reaches the conclusion that the inequality found in 2013 is probably very similar to that of the beginning of the 1990s.

4. Public policies and inequality

Reading the book leaves the way open to some degree of pessimism. Milanovic probably sees that, inasmuch as the forces of technology and globalisation are present, inequality will continue to increase in developed countries, which will result in political instability. This poses a threat to the continuity of the global convergence process and to the very lifestyle of the middle classes in the West.

Nevertheless, the pessimism needs to be qualified. As the author himself says, what the future holds for us will largely depend on the reaction of public policies. From this perspective, we can see the increase in inequalities not just as the result of the impersonal forces of technology and globalisation, but as the reflection of the lack of adaptation of public policies to the new context.

If the effect of these forces has been to polarise labour in keeping with qualification, one promising strategy would be to focus on investing in human capital. If the number of qualified workers were sufficiently high, their salaries would not grow excessively and the inequalities would be contained. Among human capital policies, research has shown that the most effective investment is that carried out between zero and three years of age. (A short, accessible summary of this research, and of the debate around it, can be found in the work of the Nobel prize winner James Heckman (2013) Giving kids a fair chance, MIT Press).

As an example of its practical implementation, the Northern European welfare states are renowned for the generosity of their family policies: direct transfers per child, education from zero to three years of age and policies to reconcile work and family life. These policies have enabled levels of child poverty to be kept low, as well as levels of growth and female employment that assure the sustainability of the system. Therefore, Scandinavians are usually quoted as a successful example as they have managed to conjugate globalisation and social cohesion. Although one always needs to be prudent when learning from the experiences of other countries, these examples indicate that, after all, there is some room for optimism.



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