global distribution of income and its political...
TRANSCRIPT
Global Distribution of Income and its Political Meaning
Branko Milanovic
Graduate Center, City University of New York
Buenos Aires, August 2019
Branko Milanovic
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)
• Political meaning of inequality decomposition
• The world of averages and the world of heterogeneity
• Technical issues in the measurement of global inequality
• The past 25 years in the rich world
• Political/philosophical issues brought up by looking at global, as opposed to only national inequalities
• Emergence of the global “middle/median class” and shrinkage of national middle classes [ANOTHER TIME]
• What kind of policies, and what can they do? [ANOTHER TIME}
Long run
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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?
The definition of the three long-run periods (“ages) from the Industrial Revolution until today
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1820 1850 1870 1890 1910 1929 1950 1960 1970 1980 1992 2003 2011 2013
Between Theil Within Theiñ
The age of empires and class struggles(divergence between countries and between classes)
The age of the Three Worlds and diminished class conflict(divergence at the peak)
The age of convergence and internal cleavages
thepast.xls
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1800 1850 1900 1950 2000 2050
Gin
i in
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Within-national and between-national income inequalities (togeher equal to global inequality) during the past two centuries,
Gini 1820-2013
Between-country population-weighted
inequalities within countries
The political meaning of decomposition• The decomposition is never just a mechanical, arithmetic exercise
• There is a political meaning in any decomposition of an inequality measure
• In this case, what is the principal cleavage: is it (a) between the countries or (b) between individuals within a country?
• In the early periods of the Industrial Revolution, (a) was small, (b) was large and increasing. Class cleavage was key, class contradictions within countries important, international solidarity of the poor feasible. (The world of social classes, that of Marx)
• Up to 1980s, (a) is large, (b) smaller. The world divided into “three worlds”, class contradictions within countries much weaker. (The world of rich and poor countries, that of Frantz Fanon)
• The current period and projections: (a) diminishing, (b) increasing. Class conflict becomes more salient, but since (a) still very high, migration becomes an issue (esp. with globalization). In some sense, now both cleavages matter.
But if people really care mostly (only) about their relative position in national income distribution?
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National relativism
Change in global Gini betwen 1988 and 2011 for different values of the lambda
Milanovic & Roemar (2017)
λ is salience of one’s position in national income distribution vs. real income
From Milanovic and Roemer (2017)
The averages
Resurgent Asia
china_uk.xls
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per
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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
From Maddison 2018; all in 2011 PPP
Heterogeneity: going beyond the averages
The poor, the middle class and the rich in the US and the UK in historical perspective
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1870 1910 2013
Data_central/…Data_WD19.xls
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The poor, the middle class and the rich in China and the UK in historical perspective
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1870 1950 2013
Data_central/…Data_WD19.xls
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1870 1950 2013
The poor, the middle class and the rich in Argentina and the UK in historical perspective
Datacentral/inequality/historical global inequality/…DataWD19
Going beyond the averages: Convergence of Chinese incomes
China
USA
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1000 10000 100000Disposable per capita income in PPP dollars
US and Chinese income distributions around 2002
China
USA
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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
Another heterogeneity: Is the world getting better?
Is the world getting better? Yes.
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1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
World GDP per capita (left) and coefficient of variation of countries' GDPs per capita (right) 1820-2016 (population-weighted)
coeff. of variation
Or perhaps not so much: 7% of people in the world live below the income level of the most advanced county in 1820; 33% below that of a century ago..
40% of people in the world live in a different century.
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two centuries late btw 1 and 2 centuries late
50 to 100y late contemporary
Technical issues in the measurement of global inequality
Branko Milanovic
Three important technical issues in the measurement of global inequality
• The ever-changing PPPs in particular for populous countries like China and India
• The increasing discrepancy between GDP per capita and HS means, or more importantly consumption per capita and HS means
• Inadequate coverage of top 1% (related also to the previous point)
Branko Milanovic
Rising NAC/HS gap and top underestimation
• If these two problems are really just one & the same problem.
• Assign the entire positive (NA consumption – HS mean) gap to national top deciles
• Use Pareto interpolation to “elongate” the distribution
• No a priori guarantee that global Gini will increase
• A memo: why simply replacing top incomes with top income shares from tax data is not a very good solution
• Blanchet, Flores, Morgan method tries to solve this issue but does so only for countries for which both data types exist and “transforms” survey data definition to fit tax data definition
Branko Milanovic
Past twenty-five years in the world:
the greatest reshuffle of individual income positions since the Industrial Revolution
=> future implications for the rich world
The watershed years, 1978-91• 1978: Deng: responsibility system: quasi privatization of land
• 1979: Thatcher: privatizations etc.
• 1980: Reagan: deregulation etc.
• 1983: Mitterrand changes course
• Mid-1980s: Gonzalez invents (avant la lettre) the “new labor”
• 1985: Gorbachev begins to dismantle planned economy
• 1991: India liberalizes
Within approximatively a decade, W Europe, USA, China, Russia/Eastern Europe, India (60% of the world population) started living under a very different system than before.
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ity
600
2100
5500
1460
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log of annual PPP real income
Global income distribution in 2011 with 2011 PPPs
twoway (kdensity loginc_11_11 [w=popu] if loginc_11_11>2 & bin_year==2011, bwidth(0.2)) , legend(off) title(Global income distribution in 2011 with 2011 PPPs) xtitle(log of annual PPP real income) ytitle(density) xlabel(2.8"600" 3.3"2100" 3.74"5500" 4.2"14600", labsize(small) angle(90))Using combine88_11.dta
10% 73% 91%50%
Median of WENAO
Global mean
Global median
Absolute poverty
All per capita values.
US bottom decile
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))
1988
2011
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sity
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100
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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
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Re
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PP
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Percentile of global income distribution
Branko Milanovic
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Percentile of global income distribution
Real income growth over 1988-2008 and 1988-2011 (based on 2011 PPPs)
1988-2011
1988-2008
Distribution of global absolute income gains: 44% to the global top 5%
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Dis
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of
gain
ventile/percentile of global income distribution
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4 9 14 19 24 29 34 39 44 49 54 59 64 69 74 79 84 89 94 99
Elephant no more? Growth incidence curve 2008 to 2013(% growth of per capita income; preliminary)
Calcul13.do
USA
India
Brazil
China urbanChina rural
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1 20 40 60 80 100percentile of country distribution
Position of national income percentiles in global distribution
All countries with income data; year 2013; preliminary data (i.e. not a full sample of countries)
Calcul13.do
India and China with rural and urban distributions
India ruralIndia urban
China urban
China rural
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1 20 40 60 80 100percentile of country distribution
Position of national income percentiles in global distribution
Argentine income distribution in a global contextYear 2013, all incomes in international dollars
USA
Brazil
ArgentinaSpain
Mexico
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ntile
of w
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1 20 40 60 80 100percentile of country distribution
Quasi impossibility of having regressive transfers from very rich and egalitarian countries to very poor countries
Norway
Mali
Tanzania
Madagascar
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1 20 40 60 80 100country percentile
Using calcul11.do and fnal11.dta
graph hbar inc_c if region==5 & group==50, over(contcod, sort(1)) ytitle(global income position of country's median-income person) Using final13.dta
Western Europe and North America: The position of a person with national median income in global income distribution (2013-14)
0 20 40 60 80 100global income position of country's median-income person
NOR
LUX
CHE
USA
CAN
DNK
AUT
AUS
NLD
FIN
DEU
GBR
ESP
ITA
ISR
GRC
TUR
graph hbar inc_c if region==3 & group==50 & mean~=., over(contcod, sort(1)) ytitle(global income position of country's median-income person)
Latin America: The position of a person with national median income in global income distribution (2013-14)
0 20 40 60 80global income position of country's median-income person
URYCHLARGCRI
PANVENBRAPRYPERBOLCOLDOMECUSLVNIC
MEXHND
HTIGTM
The past twenty-five years in the rich world
c:\branko\voter\dofils\define_variables using data_voter_checked.dta
Income stagnation and shrinkage in the size of the western middle classes
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30
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1980 1990 2000 2010 2020year
USA
28
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36
1980 1990 2000 2010 2020year
UK
28
30
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34
36
1980 1990 2000 2010 2020year
Germany
28
30
32
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36
1980 1990 2000 2010 2020year
Denmark
MarketP income-in percent
Income share of the four middle deciles
The middle class defined as population with income between +/-25% of national median income (all in per capita basis; disposable income; LIS data)
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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
And in Asia
China
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1985 1990 1995 2000 2005 2010 2015
Gin
i
All-China estimated Gini (1985-2015)
1985-2002 Wu and Perloff2003-2015 NSB official estimates
Embourgeoisement of China: the composition of the top 5%from ¾ government and SOEs to 50+% businessmen and professionals
0% 0% 2%5%3%
1%4%
15%20%30%
36%
33%
12%
25%
22%
6%
27%
21%
21%
20%
37%
24%
15%21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1988 1995 2002 2013
Worker
Clerical
Government
Professionals
Indiv.Business
Owners
From Yang. Novokmet and Milanovic, 2019
Inequality in China and the United States, 1950-2015
twoway (scatter gini_LIS year if contcod=="USA", connect(l)) (scatter Giniall year if contcod=="CHN" & year>1960, connect(l) legend(off) text(37 1978 "USA") text(32 1965 "CHN")) usimg All the Ginis
USA
CHN
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1940 1960 1980 2000 2020year
Global political issues: 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
• Who is “the top 1%”: global or national?
• Can something that is bad nationally (increased inequality) be good globally (decreased inequality)?
• Can national vices produce global virtue?
Branko Milanovic
The role of policies in rich countries
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 (pre-redistribution) income inequality
The role of economic policies in offsetting the increase in marketPincome inequality
MarketP (or market1) 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
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Gin
i
1970 1980 1990 2000 2010 2020year
USA 1969-2016
market1 income
gross income
disposable income
.25
.3.3
5.4
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Gin
i
1980 1990 2000 2010 2020year
Germany 1973-2015
Systemic inequalities in liberal/meritocratic capitalism• 1. Increasing aggregate share of capital in national income
• 2. High concentration of capital ownership
• 2a. Higher rate of return on the assets of the rich
• 3. Association of high-capital and high-labor incomes in the same individuals (homoploutia)
• 4. High homogamy (assortative mating)
• 5. Increasing control of the political process by the rich (movement toward plutocracy)
• 5a. Greater transmission of income and wealth across generations
Ginis of capital and labor income and quasi automatic transmission of rising capital share into greater inter-personal inequality
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Capital
Labor
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i co
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Capital
Labor
USA, 1974-2016 UK, 1979-2013
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Capital
Labor
Norway, 1979-2013
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1980 1985 1990 1995 2000 2005 2010 2015 2020
Gin
i co
effi
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tYear
Capital
Labor
Germany, 1984-2015
Policy implications• Rich countries can expect to have an ever greater K/Y ratios. Unless r
drops proportionally, capital share is likely to continue to rise.
• With the current K and L endowments, that implies that each additional point in K share translates into about ½ Gini point increase in personal income inequality. Is this sustainable, if e.g. the share of capital goes up by 10 points?
• Technically the link can be weakened by increased taxation of income from capital which would reduce Gini of capital income, may leave the distribution of assets (K) more or less unchanged, and could slow down the increase in K/Y.
• But four key tools of inequality reduction from the 20th century are weaker now: education, trade unions, taxes, social transfers
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 changed
• 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: homoploutia: more meritocratic capitalism where top wage earners are also top K earners (and the reverse) makes taxation more difficult
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
The end: that’s all for now!
Additional topics
Inequality and corruption
Money earned per position sold at different administrative levels(in million of current yuan)
Calculated from data in Minxin Pei’s “China’s crony capitalism; from corrupt.dta
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money p
er
positio
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old
in m
illio
n y
uan
county NPcounty partyprefecture NPprefecture partyprovince NP
Money x number of years of corruption involving multiple officials
Calculated from data in Minxin Pei “China’s crony capitalism”; from corrupt.dta
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mo
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y x
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of ye
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ptio
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county NP county partyprefect. NPprefect. party prov. NP prov. party
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48 48 5051
67
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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
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
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Gini coefficients of capital and labor income: US 1974-2013
Capital
Labor
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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
(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 the situation (B+C) to (B+A) => Brexit
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
Branko Milanovic
74
7986 91
94 970
4
7
1013
73
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8489
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04 710
84 89 9294
968
10 12Mexico
USA
Germany
Dashed line: 1 Gini pt redustributionfor 1 Gini pt increase in market Gini
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.4 .45 .5 .55 .6Gini of market income
Market income inequalty and redistribution
From voter/..define_variables