Q&A: A Development Expert on Narrowing Inequality

Branko Milanovic has been studying income inequality around the world for a long time.

Professor Milanovic, now at the City University of New York’s Graduate Center, was for many years a development expert at the World Bank. In his 2011 book, “The Haves and the Have-Nots,” he noted how inequality between countries was much larger than within them. Sixty percent of a person’s income is determined by where a person was born.

Global development may be changing that, however: While income inequality soared in the United States and other countries over the last two decades, the disparity of income between countries declined. Measured worldwide, income inequality appears to be slightly lower than it was 20 years ago.

My Economic Scene column this week discusses these findings. Following is a transcript of an email interview with Mr. Milanovic last week, lightly edited for length and clarity.

Q.

It is probably a safe bet that most people around the world â€" certainly most Americans â€" believe that income inequality is rising inexorably. Your work, however, suggests that this is not the case. At the global level, incomes are becoming more equal. How can this be?

A.

Inequality calculated among all individuals in the world, as if they were part of one single nation, has been edging slightly downward over the past 10 to 15 years, mostly thanks to very high growth rates in China and India. These relatively poor giants (particularly India) have pulled quite a lot of people out of poverty and into something that can be called “the global middle class.”

That is the key factor behind the decline of global inequality: The distance between their incomes and the rather stagnant incomes of the middle class in rich countries has diminished. Yet global inequality is still extremely high by the standards of any single country. It is, for example, significantly higher than inequality in South Africa, which is the most unequal country in the world.

Q.

How are these dynamics related? Must poverty reduction in China, India and other poor countries come at the expense of stagnating middle-class incomes in the United States and other rich countries?

A.

I am not sure this must have happened, but this is what seems to have happened. The more active global participation of Asian countries pitted their workers in direct competition with the much better paid workers in rich countries, whose productivity may not have been high enough to make up for their higher wages.

This seems to have led to rising incomes for workers in “resurgent” Asia and stagnation of middle-class incomes in the United States and elsewhere in the West. We cannot “prove” causality between these developments simply because the processes are too complicated, but this is what the facts seem to suggest.

Q.

The worldwide decline of inequality has a perplexing pattern: Even as it has declined between countries, it has increased within most countries. You detect everywhere a concentration of income at the very top. Is this a necessary feature of globalization? Must we get used to permanently higher levels of national inequality?

A.

The rise of inequalities within nations is a notable feature of this globalization, often driven by large income gains concentrated among the top 10 percent, or 5 percent or even more narrowly 1 percent of the population.

Roughly speaking, globalization has produced two main winners: the very rich people everywhere and poor and middle-income people in Asia. The latter are not of interest, or even visible, to the people in Latin America or Europe or the United States. They see that their own 1 percenters have become much richer.

This dynamic may persist, at least in the short run, for two reasons. First, there is another wave of poor countries following China, which may continue putting pressure on Western wages. Second, reducing inequality through higher taxation on capital or corporate profits may not be possible because of capital’s high cross-border mobility. If global processes continue as before and Western countries cannot do much nationally, I do not see much chance for a change in the inequality that we have now.

Q.

Despite these patterns, you find that â€" at least until the financial crisis â€" there were no absolute losers: People at all points in the global income distribution experienced income gains, on average. If global inequality declined and everybody’s income rose, shouldn’t we think of globalization as an unquestionably good thing?

A.

Globalization is certainly a good thing, and global income data do show it: People at any point of the global income distribution are better off today than they were a quarter-century ago.

From a global perspective, it is not a problem that the income gains are greater for the relatively poor Chinese and Indians than for the relatively rich Americans. We are normally in favor of such pro-poor changes when they happen within a single country.

The political problem arises because the gains have been distributed unevenly across countries â€" some have gained much, while others not at all â€" and across income groups within countries. Since our political life is organized at the level of nation-states, not globally, this creates political problems.

Q.

Wasn’t the classical argument for globalization that it would help the poorer countries catch up to the rich? Didn’t we get what we wanted?

A.

Yes, we did broadly get what we wanted. We should not forget, though, that there are large parts of Africa where average incomes have not budged at all in the past 20 years. In a dozen African countries, per capita incomes are at 1960s levels.

To give you just the two examples of the countries very much in the news today: Ukraine’s peak income ever was in 1989, before the breakup of the Soviet Union; Venezuela achieved its peak in 1977.

Globalization did not deliver everywhere. But it delivered in a very important way by helping the huge masses of people in Asia. In the past, it was often thought an impossible task to lift out of poverty millions and millions of people in China and India. This has clearly been proven wrong.

Q.

There are vastly varying levels of inequality within rich countries. Income concentration has grown much faster in the United States than, say, in France or Sweden. This would suggest that national policies make a difference. What would be your advice to rich countries concerned about globalization’s impact on income distribution?

A.

National policies obviously do make a difference. The increase in inequality was not nearly as strong in continental Europe as it was in the English-speaking countries, although they have all been exposed to more or less the same forces. The structure of their labor force and their wealth levels are similar, yet economic policies did differ.

It could be argued, as it was some time ago by Dani Rodrik, that it would be in the self-interest of the winners of globalization to accept greater redistribution through higher minimum wages, publicly funded education and larger social transfers. This could prevent the backlash against globalization coming from those who lose out or do not partake in the gains.

These measures would not only help avert the discontent that could derail globalization. Over the long haul, they would also help economic competitiveness. But people think that such measures could damage the economy in the short term. Hence, you have the usual conflict between what is good right now and what is good over a longer period of time.

Q.

How do you see these dynamics affecting economic policies around the globe? Growing income inequality appears to be sapping political support for globalization in the developed world. Should we expect an inward turn to protectionism?

Pro-redistribution measures should help avoid such a turn of events. Although I do not think that we shall go back to the destructive policies of the 1930s, I think that one can detect beginnings of such a backlash in the anti-immigration policies sweeping Europe right now.

Q.

The dynamics you sketch out suggest the emergence both of a large global middle class and a very powerful global elite of 1 percenters. How would this affect the world’s political systems? Should we expect political power to be captured by the globalized rich? Or is this a recipe for global populism, as the middle class in each country rises against globalization?

A.

The contrast is between a globalized economy that largely determines our employment and income level, and political systems that remain national. This contrast was not nearly as strong before the 1980s, when national economies were not as interdependent and capital could not flow easily across the borders. Then, countries could more or less design the economic policies that suited them. Today this is no longer the case.

The danger is that these dynamics could lead to populism â€" a sort of a Luddite reaction against globalization â€" or to plutocratic rule. We can already see some hints of the latter. Rule of the rich would ensure the continuation of globalization, but it would deprive political democracy of any meaning. If I wanted to be somewhat melodramatic, I would have said that the challenge is to navigate between the Scylla of populism, which would do away with globalization, and the Charybdis of plutocracy. Our defining challenge is how to maintain both globalization and meaningful national democratic systems.