Why Inequality Attracts Economists’ Attention, and What its Global Paradox is

Dialogue Chain. Episode 1. Shlomo Weber, NES President, interviews Branko Milanovic, one of the world leading experts in income inequality.

Dialogue Chain. Episode 1. Shlomo Weber, NES President, interviews Branko Milanovic, one of the world leading experts in income inequality.

Weber: Branko! Could you comment about the global trends of inequality and maybe a few words on Russia would be also appreciated. So, where do they think we are going as a planet, as a country as well?

Milanovic: You know, when you ask where the trend is I can tell you first the answer is that the global inequality is, obviously, extremely high. It’s higher than inequality in South Africa. But the trend is down. So, that seems at first a paradox. They say, “Well, we all worry about inequality but you're telling us the world is getting better." And that’s true. But what is happening at the same time, and I will explain why, is that inequality in most countries in the world is increasing. Now how can global inequality go down? But it can go down because big countries that were poor like China, India, Indonesia, Thailand and so on have become gradually richer and richer. So, what in a global perspective in the world lots of, actually, couple or three billion of very poor people have moved toward the global middle class and some of them even higher. So, this is a remarkable change. And when we had the discussions, whether it is in Moscow or elsewhere, the reason why this global inequality work attracts attention is because it is the undoing of the effects of the first Industrial Revolution. Before the Industrial Revolution, you had levels of income between the countries which are very similar. You had China which was about 1/2 of the GDP per capita of the Netherlands, of the UK that were more developed. What happened with the Industrial Revolution is the Western Europe and Japan later just pulled ahead and became rich, India and China stayed at the same level and went down. And for many of our generation we took that as normal because we had that story of the three worlds, you know: capitalist world, socialist world, and the third world. But that story, now we can see, is a temporary story. We now have the rise of Asia and the return to the relative income levels which existed before the Industrial Revolution.

Weber: Okay.

Milanovic: So, this is actually the dramatic change that we are witnessing.

Weber: It took some time, right?

Milanovic: It took some time. It took two centuries to do that.

Weber: So, I’m still bringing you to Russia. Government officials and researchers have conflicting views about the pattern of inequality in Russia. Some claim it’s declining; some are not sure. But it’s difficult to say and the data definitely is not reliable all the time. So, what is your view? It’s not necessarily my question on what’s really happening now but where do you see Russia’s trend of inequality going?

Milanovic: Yes, so, let me for Russia say two things. If I can go back to the story about the change of the world over the two centuries. It has a very dramatic implication for Russia that I indicated in the introduction to my book 'Global Inequality', which was translated here. If you think of this, we are now having the situation of the Eurasian continent where the rich parts are, as they were in the 15th century, maritime parts. You have the rich edges of Western Europe going from England all the way to Italy and Spain. It’s actually where the wealth is. Obviously, Germany and so on. And then another pole of wealth is the maritime provinces of China. Geographically, it leads to the problem of Russia. It is actually that Russia with the rate of growth that it currently has is going to fall behind these two most dynamic maritime parts: the Atlantic and the Pacific. Now, to go back more concretely to the question of Russian inequality, I will not go into numbers, we know that actually with the Luxembourg Income Study where I work we have acquired new income of the population survey of Russia which includes income, of course, uses income and shows a decline of inequality. But that’s a small decline, the number of Russian inequality is not dramatic. But I think that actually the very top incomes are underestimated which is not special to Russia.

Weber: Yeah.

Milanovic: But because these top incomes in Russia are so big underestimation in Russia may be larger. So, that's one thing. Secondly, the wealth concentration in Russia, as we all know, is extraordinary. And what is extraordinary is that wealth concentration was accomplished over a very short period of time, essentially, in the 1990s. I don't have a solution to that, but I think it is something which will for many decades, actually, burden the Russian development. And in that sense, I really have to say that I believe and, actually, I worked in Russia in the 1990s it was the way that the privatization was done that actually will burden the country for a couple of the decades.

Weber: Only decades?

Milanovic: It could even be longer, you know. And if for example, China also has the concentration but, you know, they didn’t build an empire the same way the Russian oligarchs did in one week. They built an empire for over 15 years. So, it took, actually, much longer time. And the concentration is now probably getting to the Russian levels but I think it's probably a little bit lower.

Weber: Well, staying on the issue of inequality, let me be a little bit a devil’s advocate and ask you: why inequality is important? Is there any evidence that inequality is really that important for economic outcomes?

Milanovic: In the 1990s and I don't want to expand too much but in the 1990s there was a lot of literature arguing all three ways. Inequality is good for growth. Let’s suppose, China. China grew tremendously but inequality grew as well. Then there’s literature that said that we cannot really establish any relationship. And then there was literature that said inequality is bad for growth. Now that literature really has to take a little bit longer term, horizon, because when you look at, for example, you look at Western European countries and the United States, they had between, let’s say, 1945 and 1980 tremendous decline in inequality and at the same time tremendous growth. We are talking about increases of GDP per capita by three times and inequality in the Gini measurement becoming half. This is, you know, dramatic development. So, it’s all three possibilities. However, I think more recently, and I want to mention my paper, but there were several others, the paper that I did with Roy Van der Weide of my co-authors showing that, actually, inequality has a negative impact on growth or some parts of the distribution. So, actually, the rationale for that is that inequality might actually prevent some people from being part of society, taking education, being part of education. That might lead to bad health which, of course, itself is bad for productivity. It might lead to social instability because of, let’s suppose, political developments. And then investors don’t want to invest. So, I think there’s now growing literature using much better data arguing that inequality is bad for growth.

Weber: For so many years you've been almost alone in the wilderness of inequality, for more than 20 years. Now, everybody talks about inequality. So, my question is, therefore, how did you feel then and how do you feel now?

Milanovic: Well, Shlomo, this is a great question, actually. I love answering questions like that because it makes me feel good. You know, let me go back to how I felt then. Very briefly. I don’t want to go through my whole life. I will give you an anecdote from the Carnegie endowment where I, actually, worked for two years. We had a very good president, and she said to me, “Okay, so, give us the list of what you want to study in the next two years." So, I wrote. It was something about inequality. Probably, in those days still world inequality, inequality in transition countries, or something. And she said, “No. The word 'inequality', you just delete it and replace with the word 'poverty'. Because, you know, we have in the board many rich people, and when they see the word 'inequality' they immediately feel you want to take something from them. When they see the word 'poverty' they feel good about themselves because they’re helping the poor people." And then the situation changed as you mentioned. So I feel good obviously now I’m very happy.

Weber: So, what are your research plans? I know you've completed the book…

Milanovic: I finished a fairly large project, which was a book called 'Capitalism Alone'. And that book deals with the fact that capitalism is the only socio-economic system that we now have in the world. Whatever country you take is a capitalist country. And I define capitalism very simply. The existence, basically, of means of production of private, decentralization – coordination is decentralized – and waged labor. So, that’s over, you know, the draft is done and I think it would be out in the summer.

Weber: Congratulations.

Milanovic: Thank you very much. I, actually, hope it will be translated into Russian, like two of my books have already been translated. But to be quite honest, I really believe that this is the most interesting.

Weber: Changing the gears a little but I must ask you the following question. You know, you and I, we travel across different countries and continents and my feeling is that many places, most of the places, all the places feel in trouble these days.

Milanovic: That’s true.

Weber: And the trouble is not necessarily the economic well-being and the economic indicators but the way people perceive the economic situation.

Milanovic: Yes.

Weber: So, are you optimistic?

Milanovic: I'm pessimistic on two accounts. I’m pessimistic because I think what has happened is that with the internet and the media and all of that we are for the first time able to see our rulers much more closely. And I do think that the trust of rulers, whoever they are, you know, politicians in general, has plummeted partly as the result of that. Because we now not only can see how they behave we know much more about corruption, about what their wives do, about whom they promote and how. And that information which in the past was very self-contained because it was either you tell me a gossip or I tell you. And you know, there was that saying: “No great man, no Napoleon is a Napoleon in front of his butler or maid”. So, they're, actually, to some extent all naked in front of us, so we really have lost part of the trust in them because of that. And I don't think it is a reversible process because it’s not going to change. And many of them, of course, have not behaved very well. And my last point on that is they have not behaved well and I think it's important to realize. Because they themselves have absorbed and had to absorb all the features of globalized capitalism. And globalized capitalism is a system that puts money at the pinnacle. So, if you are a politician it is a job in which you hope to make money eventually. In some countries, maybe Russia, you make lots of money while you’re a politician but you make even more outside. But in most countries, although they say they’re much less corrupt in reality it's a process when you make lots of money in the job and then one year later you say, “Okay. I’m not dealing anything with that company when I was in the government or in the ministry where I was, you know, managing. But then, of course, I come back as a consultant.” And, I mean, there is no need to go to thousands of examples of people who have been prosecutors and become defenders. I don’t know if you saw this case in Japan, the guy who was defending the Frenchman who is in jail now there, [Carlos] Ghosn, is a former Chief Prosecutor of Japan. This is your best lawyer. Who are we to get as a lawyer but the prosecutor? The president of the World Bank left developing institutions suddenly because he decided to go to the investment bank. So, this is so common. I mean, if you look at Blair, if you look at Clinton, if you look at Hillary Clinton, if you look at Barak Obama. This conversation with Barak Obama, probably, would cost you about a million dollars.

Weber: No, well. I hope it will be cheaper for us.

Milanovic: 80,000 dollars.

Weber: But I still want to ask you the last question. A little unexpected one. Through the framework of this discussion, you will have a chance to talk with somebody else, not with me. So, whom would you like to talk with?

Milanovic: Well, I enjoyed our conversation a lot but I would, actually, you know, recently I re-meet here with Natalia Zubarevich whom I admire and I’ve read some of her work and I’ve listened to her presentations. So, she would be the person that actually I would love to talk to.

Weber: Okay. Thank you very much. I just must mention that it’s a first full-time conversation I had with Branko Milanovic that was not on soccer. So, thank you very much.

Milanovic: Thank you very much. It was a pleasure.