Inequality and the rise of the global 1%: great new paper by Branko Milanovic

December 14, 2012

Forget swimming pools and bra hunts, it’s time for the Great Intern Debate

December 14, 2012

Milanovic on inequality (continued): implications for politics, alliances and migration

December 14, 2012
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In which, following on yesterday’s post,  Ricardo Fuentes and I decide to carry on chatting about the new Milanovic paper on inequality

Duncan: Great intro to the Milanovic paper, Ricardo, but there’s plenty more juice to be had, I think. First let’s take a closer look at the graph you put up of change in global real income 1988-2008 (below). As well as the spike of the top 1% (and do we know whether the financial crisis has moderated or amplified the spike?), the bit that jumps out at me is the stagnation of incomes above the 75th percentile. For that portion of the world’s population in the top quarter of the income bracket, but below the super-rich 1%, the last 20 years have been pretty terrible.

Milanovic fig 1

Milanovic calls this the ‘global upper-middle class’ and says it includes many in the former Communist countries and Latin America. But my guess would be that it mostly corresponds to the non-elite working population in the formerly rich countries – reflecting the kinds of income stagnation we have seen in the US and (to a lesser extent) Europe. Is that right, or might this also be hitting the upper income levels of middle classes in emerging economies?

Ricardo:  I think you are right, the middle class in Western democracies have suffered stagnation in their standards of living – when they’ve been lucky. There is plenty of evidence of that happening in terms of wages but also in terms of perceptions. When you ask middle class Americans about their future, they don’t seem optimistic. It would be interesting to identify the percentiles in Milanovic’s graphs with per capita income and try to figure where they live.

Duncan: The politics of that seem at first sight a bit grim. Taking a crudely reductionist line that people support the status quo if it delivers them faster than average rising incomes, and oppose it if it doesn’t , you would expect a pro-globalization alliance between the super rich and the 10-70th centiles (= emerging economies and their governments?), opposed by the non-elite rich country populations in between. Is this the graph that underlies rising European/North American hostility to immigration, northern trade liberalization etc? If they could establish any kind of political connection, their natural allies would be the people at the bottom of the pile – the bottom decile. Maybe that’s what (some) INGOs are doing?!

Ricardo: I’m not sure this kind of alliance would naturally happen because the source of income gains is likely to be different. I don’t have strong evidence on this (my best read is this report from the OECD) but the guess, being overly simplistic, is that the improvements we see in the bottom of the global distribution are related to increases in wages for workers in emerging economies (the jobs that have been outsourced). The gains in the super rich most likely come from returns to assets and benefits from the financial system. Again, I’m mostly guessing. This is something we could look more into.

Duncan: The Milanovic paper also dug up some startling findings in other parts of the inequality debate. How about this:

‘Perhaps for the first time since the Industrial Revolution, there may be a decline in global inequality. Between 2002 and 2008, global Gini decreased by 1.4 points. We must not rush to conclude that what we see in the most recent years represents a real or irreversible decline, or a new trend, since we do not know if the decline of global inequality will continue in the next decades. It is so far just a tiny drop, a kink in the trend, but is indeed a hopeful sign.’

That’s dynamite. As I understand the paper, this is driven by the rise of India and China, despite their soaring internal inequality. I don’t have the maths, but you do – is it possible for the global income distribution to get more equal, even if all its major players are becoming less equal internally? And if so, is that a temporary statistical blip til global inequality once again starts to rise?

Ricardo: This apparent contradiction is very plausible – in fact, it was at the heart of an old and influential paper by Xavier Sala-I-Martin. The Economist summarized it better than I could here.  According to Sala-I-Martin, the global distribution of income inequality declined between 1980 and 1998 but this conversation can quickly become very technical if we contrast the results. For me, the global Gini is a moot point because, for all we wish, we are still not a global community. Aspirations, tastes , institutional rules and the sense of community is still determined by the nation-state. Except for the global one percent. That’s partly why I think the most important part of Milanovic’s paper is the spike at the top of the distribution.

milanovic marx v migration

Duncan: The other really nice piece of his paper, although I’ve seen it written about elsewhere, was his ‘migration v Marx’ chart (above). Decomposing the sources of inequality, he finds that in 1870, the class position within countries determined 2/3 of global inequality; whereas now it is down to a third. Instead, it is geography – which county you live – that explains 2/3 of global inequality. That also has profound political implications, as Milanovic recognizes:

‘If the world’s actual situation is such that the greatest disparities are due to the income gaps between nations, then proletarian solidarity does not make much sense. Indeed income levels of poor individuals in poor countries are much lower than income levels of poor people in rich countries. Those who are considered nationally poor in the United States or the European Union have incomes which are many times greater than the incomes of the poor people in poor countries and moreover often greater than the incomes of the middle class in poor countries. And if that gap is so wide, then one  cannot expect any kind of coalition between these income-heterogeneous groups of nationally poor people, or at least not any  coalition based on the similarity of their material  positions and  near-identity of their  economic  interests.’

Unless global inequality falls, and some new convergence of interests occurs, of course. But even if you accept his reversal of the last few years, that still seems an awfully long way off.

Finally on migration, I really liked his question: ‘can we treat location, and thus citizenship, as a rent or a premium (or obversely, as a penalty)?’ He points out the double standards of disapproving of inherited wealth, and yet accepting it when that wealth springs from the geographical accident of birth:

‘In one case, we frown upon the transmission of family-acquired wealth to offspring if two different individuals belong to the same nation. In the other case, we take it as normal that there is a transmission of collectively acquired wealth over generations within the same nation, and if two individuals belong to two different nations, we do not even think, much less question, such acquired differences in wealth, income and global social position.‘

He doesn’t try and draw out the political implications of this – perhaps just as well!

Ricardo: And I won’t try either. Let me just say this: inclusive migration policies could do a lot for the lives of poor people. But that’s something we should discuss some other time.

5 comments

  1. Very interesting – thank you.

    The only point I could disagree on is the idea that we are “disapproving of inherited wealth”. I’m not sure who ‘we’ are in this case, but certainly not the majority of British people. British people do disapprove of very rich people inheriting wealth, but when the inheritance tax threshold got close to an average house price it was politically unacceptable and the threshold was quickly pushed way up to where it only applied to others. So as usual, the majority are in favour of a tax applying to others who are much better off than themselves.

  2. I’ve heard this “geographic accident of birth” described as a “birthright lottery” which seems an apt description in this case. There is more than just income gap related to geo-birthright as well. Questions of access, legal status, etc. Not in the least, the development of a shared identity seems tied to location.

  3. this is a fascinating debate. the economist continues to add to this too- it appears the GINI in china is 0.61- not far behind South Africa. It is almost certain that inequality in India is also woefully under-represented. Interestingly asset wealth is usually massively under-represented in GINI surveys, presumably as hedge fund managers are too busy creating wealth to answer surveys.

    I think the political implications of the super rich are predominantly about capture of the political process- that is the hallmark of the modern era- whether in Europe, the US or most of the developing world. How else can India, the world’s greatest democracy still have 450 million people on 1 dollar a day after 65 years of independence.

    one fairly marxian argument is that the plutocratic elite have an interest in driving down wages in the north, by globalising labour, but they only managed to do that by creating a debt mountain to prop up consumer demand in rich nations whilst wages stagnate. hard to see how that has much of a future.

    anyhow fascinating stuff

  4. Does Oxfam have a view on the methods of inference Dr Milanovic uses from the data?

    I have sent a comment to Dr Milanovic’s blog post asking questions:

    http://blogs.worldbank.org/developmenttalk/the-real-winners-and-losers-of-globalization

    ……………………

    Branko Milanovic wrote: “…thanks to a database of household surveys put together recently by the World Bank, we can actually find out for the first time, from a single and consistent data source, who the real winners and losers of globalization are.”

    Matt Berkley: As a non-economist, perhaps I am failing to understand your thinking. The data omit:

    a) analysis of what people need to spend,

    b) capital gains or losses,

    c) changes in debt levels,

    d) non-traded benefits such as health or education services or environmental factors,

    e) spending on things which may be neutral or harmful such as overuse of drugs (tobacco, alcohol),

    f) spending on things which may represent partial or total compensation for disbenefits such as in the case of medical expenses;

    g) demographic influences on population or population-segment statistics, as distinct from influences deriving from trend changes for individuals and/or families – you are inferring aggregate longitudinal trends for individuals from cross-sectional statistics.

    There may be a reason or reasons why you make that statement in the light of those omissions. Could you please explain what such reasons are?

    Secondly, could you please explain why you say there is a single and consistent data source (see below on survey methods and possible variation)?

    BM: Household surveys are nationally representative surveys of people’s income or consumption.

    MB: Strictly speaking, the surveys are not of either. They are of answers to questions about income, consumption expenditure and/or the value imputed by researchers to answers on own produce consumed.

    My third question is: Why do you say they are nationally representative when:

    a) Martin Ravallion has said that the rich and the destitute are hard to reach,

    and

    b) the survey methods may vary across time or countries in respect of recall periods, questions asked, methods of imputing value to own produce (farm-gate prices versus market prices) and so on?

    BM: This adjustment is done by converting incomes into so-called dollars of equal purchasing parity (PPP dollars) such that with $PPP 1 dollar, a person can purchase the same amount of goods and services in any part of the world.

    MB: Fourthly, I am unable to see how what you say about what has been done with these adjustments is true. Why do you say people can purchase the same amount of goods and services in different places with a PPP dollar, and by implication could do so at different times?

    For all years prior to 2005 the conversions were done wholly from national CPI rates. These were not adjusted for spending or consumption patterns, or prices faced by the people, at any different levels of spending/income/imputed-value-of-own-produce-consumed.

    In practice, I cannot purchase the same amount (or the equivalent amount) of goods and services in different countries with such a PPP dollar’s worth of local currency, because I cannot buy a tiny fraction of an expensive item. Expensive items have disproportionate effects relative to the numbers of people buying them on the CPI.

    So it is hard for me to see how what you say is true even for purchasing power over the mix of all goods and services that the national CPI measures.

    Whether it is true for purchasing power over items people actually buy at different levels of spending/income etc – for example at the PPP $1.25 level – is not known.

    There may be some reason why you infer that the buying power of PPP dollars does not vary across countries or times according to levels of spending etc – if so, perhaps you could explain the reason.

    Similarly, your references to “real income” are in the context of national PPP rates for all levels of spending/income etc, at least most of the period.

    BM: …the proportion of what the World Bank calls the absolute poor (people whose per capita income is less than 1.25 PPP dollars per day)…

    MB: The context (your mention of those slightly less poor than the poorest 5%) does relate it to the kind of level you are talking about. But your phrase “what the World Bank calls the absolute poor” is incorrect.

    They are in fact people the World Bank calls “extremely poor” in the context of claims that what is being measured is absolute poverty.

    Also, it is not really simply income, as mentioned above.

    The World Bank Millennium Goal monitoring team of Chen and Ravallion chose the $1.25 line you mention because they see it as representative of the lowest 15 or so national “poverty lines” in the years closest to 2005.

    They chose the $2 line as representing the median “poverty line” in “developing countries”. The mean line would be somewhat higher.

    Fifthly, why are you using the terms “real income” or “absolute income gains” when it is not really income, and the inflation adjustments are not for prices faced by people at different levels, and there is no mentioned thought about needs for expenditure on rent, food or other things?

    BM: In 1988, a person with a median income in China was richer than only 10% of world population. Twenty years later, a person at that same position within Chinese income distribution, was richer than more than one-half of world’s population. Thus, she leapfrogged over approximately 40% of people in the world.

    MB: The sixth question is this: Why are you saying she became richer than that proportion of people?

    The statistics on countries as a whole are based on answers to questions about what people spent etc. as described above. Spending is, if one assumes for some reason that the answers were accurate and the data adequately comparable in reliability and survey methods, a measure of flow, not acquisition. So is income.

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