Will Global Inequality Ever End? Feat. Branko Milanovic, Economist and Author (Ep. 24)

We now have in the world only one socioeconomic system, and that socioeconomic system is capitalism. Capitalism should not be seen as some idealized system where everything works fine; it never worked like that.

Capitalism is currently the only game in town, but it comes in different flavors. China is indeed, in the economic sense, a capitalist country. It's a capitalist country because between 70 and 80 percent of the value added is produced in the private enterprises. However, China is not exactly like the United States because the state has a much greater importance, including controlling what Lenin called the economic heights of the system.

Global inequality is on the decline. These countries that used to be poor are China, India, Indonesia, Thailand, Vietnam, and so forth, and they have moved up in the income distribution. And they have lots of people, and thereby global inequality has been reduced significantly by 10 Gini points in the last 25 years.

China may be slowing its rate of growth, which I think is not unexpected.

India is obviously a giant, and India now, I would say, comes to play a geopolitically more important role because India is the only very important country, plus a nuclear power, which is not in anybody's camp. It has a democratic system, it has a strong role of the state.

Well, thank you so much for the invitation. Of course, it's a pleasure to be on your show. I mean, particularly because you have also quite well-known people with very strong opinions, whether it be about China, globalization, you know, the new economic order, if you will, or inequality. So I'm actually very happy to contribute to this very interesting podcast discussion.

It's kind of hard to do it in two or three minutes, so let me try to be brief and to sort of highlight the main steps, actually, or the main decisions that I made. I did my dissertation in 1987 in Yugoslavia, and I want to point this out because the topic was economic inequality in Yugoslavia, which is very similar to what I continued doing then over the years. It was really using household surveys, calculating inequality, sort of looking at whether there was a relationship between the inequality and the increase in productivity, and the differences in inequality between different social classes. You know, the classes existed, I mean, not in the market sense, but there was a division of the population in the data into rural, urban, so-called mixed households, and pensioner households.

Then I applied and I got a job in the World Bank in the 1980s. The war in Yugoslavia started in 1991, so that actually made for sure that I will not go back during the war. So actually I spent it in the US. I spent it at the World Bank, and then I worked for about more than 10, well, maybe 10 years or so, well, actually maybe 15 years in the World Bank research department, which was an ideal place for me because it was the research unit in the research department that did the work with household surveys all around the world. So that basically continued my dissertation work that I did in the dissertation, but now on a much broader scale. For many people, that's the unit that has become famous by producing that $1 per day poverty line that now is $2.15, but the same idea still exists, is to measure absolute poverty. And it is in that unit that I had the idea, I think it was '99, my first paper was 1999, when I said, like, why don't we do global inequality? That did not really meet with a huge sort of, you know, acclaim or interest because people were saying, oh, you remember Jagdish Bhagwati saying this makes no sense. Why do you put a rich person from Nigeria next to a poor person in, you know, Zambia? Who do they have in common? And so on. Anyway, so to cut the long story short, this is what I continued working on. It led to the production of this quite famous elephant graph that many people have heard, which then, of course, had implications for globalization, for who won, who lost, the relationship between China, the United States, and then, of course, that led me to "Capitalism Alone," which actually is dominated by the relationship between the US and China. And that was not an accidental thing because at the same time that I was very much interested in numbers, I was always very much interested in social issues. As a kid, I was actually quite an assiduous reader of Marx, and consequently, then to some extent, all of that came together in that interest both for society and capitalist development and why socialism failed, and the numerical part which really had to deal with inequality. So that's more or less the story. I hope it makes sense. You know, every story of life towards the end of their life, it starts making sense because it seems inevitable, but everybody who lives that life knows that nothing is inevitable, that life could have really taken very many different turns, and we would also tell it as almost an inevitable life.

I love biographies, but I'm actually also skeptical of them because every biographer, by definition, has to tell a story. So the events which happen, as I said, provide the story, and there is a certain amount of almost inevitability that it should develop only like that. But as I said, we do know that actually the dots, when they are being formed, can lead you in very different directions. And there is, you know, that's also an issue of inequality. That's what John Roemer calls the difference between, um, what he calls episodic luck and circumstances. You know, episodic luck means that you get a job because it just happens at that point that somebody else has left. So this is not something that you could forecast, and that might make a huge difference in your life that you were just simply lucky.

Yeah, well, okay, let me just say, I think actually first, "Capitalism Alone" is probably in terms of readership and, well, maybe not the most successful book, maybe "Global Inequality" was more successful in terms of readership, but "Capitalism Alone" combined the two things which I already alluded to. This is the social part and the empirical part which dealt with inequality. Now let me go for the social or political part. My argument there was first to say that we now have in the world only one sociopolitical, socioeconomic system, and that socioeconomic system is capitalism. I follow there very closely definitions of Max Weber and Karl Marx, which is very powerful and very simple. The definition says that capitalism is really basically defined when the majority of production is conducted on privately owned means of production, where most of labor is hired labor. Most, I'm always saying most, you never have a system where this is 100 percent. And that decentralization, coordination between different units is decentralized. So there is no plan, there is no sort of general scheme of how things would go.

Now, if you look at that, and that was my second point, China is indeed, in the sort of economic sense, a capitalist country. It's a capitalist country because about between 70 and 80 percent of the value added is produced in the private enterprises. More than 80 percent of the labor force is working either on their own land, as they are in the countryside, or they are working with their own or other people's, not government, tools of production, which is capital in the urban areas. So really, the state employment is under 20 percent. State-owned enterprise employment plus government administration plus party and so on. And obviously, the decentralization, the system is decentralized. However, China is not exactly like the United States, and it's not like the United States because the state has a much greater importance, including controlling what Lenin called, you know, the economic heights of the system, in the sense of the banking system, banking and finance, electricity consumption, iron production, even, you know, now we have seen new tech firms. So the state has some very important presence, plus it has an implicit power which is greater than the implicit power in the United States, for example, to decide to annul in the last moment the IPO that Jack Ma was planning several years ago, which actually really required a very strong state to do that in 24 hours. So that's why it is a political capitalism and not liberal capitalism of the United States, but it's still capitalist. And my final point, I'll be very brief on that, was in chapter three, which deals with China, to derive the political capitalism nature of China from the original socialist revolutions there, in the sense that the socialist revolutions played a role in China and Vietnam, and then I have a list of about a dozen of other countries which was very similar to the role that commercial bourgeoisie played in the West. It sounds at first counterintuitive, but when you think more about that, what communist revolutions did, they actually got rid of all the impediments to the development of capitalism in China by breaking the power of the feudal classes, improving education, bringing women into the labor force, nationalizing and then privatizing land, destroying landlords and their power, which resided very often in usury. So they really destroyed these impediments to growth, and then they planned to make socialism, but that didn't work, and actually what they did was create political capitalism. So that I think is an important message in the book, and that's why the title of the book is "Capitalism, Alone." Now, "alone" means there is no other competitor, but "alone" means, and we will talk about that for sure, that you don't have, you have a monopoly, and once you have a monopoly globally, you actually display some very bad features of capitalism which were concealed or not really emphasized when capitalism had to struggle for domination with socialism. So that's what "alone" means in the title.

Well, you know, first of all, as I was saying before, capitalism is currently the only game in town, but it comes in different flavors. And actually, as I mentioned before, it's not only China and Vietnam. You can actually, there are very strong elements of political capitalism in countries like Ethiopia, for example, Laos, Burma. You can even speak of political capitalism in Russia or even in Hungary, even in Turkey. So, you know, there are different versions of the strong state, which is a capitalist state, and that's what I mean. Now, the US state, of course, has increased in some respects because of COVID, but, you know, that was a one-off event with very large transfers, which, by the way, you see in income distribution data. And if you want to make people angry, you tell them that the largest decline in US inequality in the last 50 years took place under the last year of Trump's presidency. So they hit the roof, but it's a fact because the Congress, not Trump, but Congress passed really the huge, what, 15 percent GDP acts, several acts which supported small businesses, individuals with low incomes, people who lost jobs, and so on. So that was really unprecedented in the scope and size. So that's what happened.

Now, how is capitalism working? I would, let me put it this way, I would not say with Sharma, "what's wrong with capitalism." Capitalism should not be seen as some idealized system where everything works fine. It never worked like that. It was actually, if you go back to Adam Smith, it was the system essentially of, when he describes it, where the acquisition of wealth was done through plunder, monopoly, monopsony, colonization, cheating. I mean, he's incredibly critical of, of course, East India Company, of world trading companies, Venice, Genoa, Pisa. So that's how capitalism was created. We know that, of course, you know, slavery played an enormous role, serfdom, and so on. But it was still capitalism. But if we imagine that capitalism is some kind of society, alas, that first all endowments are somehow really legally obtained always through exchange, which doesn't have power relationship there, and then you sell and buy things again on markets that are perfect and there is no political or other power, well, simply that capitalism never existed nor will it exist. So I think then we should not use that imagined capitalism. We might use it as a sort of indication, but not really something against which we have to judge the current capitalism.

Now, let me just move one small thing about creative destruction. You know, people talk a lot about creative destruction. Indeed, it is in Schumpeter. But talking now about "Visions of Inequality," the first definition was Marx. It was in Marx, and Schumpeter actually acknowledges it, says it actually comes from Marx. But more importantly, Schumpeter argues very strongly, if you have a creative destruction, you have certain companies that are the best in innovating these things, and you have monopolies. So he actually sees capitalism as monopolistic capitalism by its very nature, and that's what we see today. If Microsoft, Amazon, Google, and others have taken large chunks of their respective markets, that's precisely what Schumpeter was expecting, because they did creative destruction, they introduced new technology, and they monopolized. So for Schumpeter, the normal capitalism is monopolistic capitalism, and he also believed that monopolistic capitalism is more efficient in terms of production. So even for him, the capitalism that we should keep in mind in the background is not Varian capitalism, simply because he also believes that capitalism doesn't exist.

You know, I'm not a huge fan of sort of taxonomies. I could have made another taxonomy and then sort of played with different countries left and right, but I think it is sufficient that we should keep in mind that, sort of ideal-typically, like in Max Weber, we really deal with two capitalisms. One where it's liberal because it is liberal in the political arena. That's what the thing is. It is liberal in terms of multiparty democracy. It is also maybe plutocratic because this multiparty democracy really depends on money, but it is liberal in the sense of ability to, you know, to speak freely and to participate freely in the political process. On the economic side, it is capitalist. Now, in the case of China and elsewhere, we have, maybe you can call it state capitalism, as Lenin called it. I think it's perfectly fine to call it state capitalism. I chose the term political simply because it comes from Max Weber, and it seems to me it's a little bit maybe better because it shows the very heavy dose of political involvement in the economic sphere, which is just not left out. And the state is autonomous. When I say the state is autonomous, it means that the state can make decisions that are really not determined only by the interest of the capitalists who are actually running the system. And of course, I mentioned several of such decisions that China did and would be very difficult to do in the US simply because the American system is more strongly politically controlled by the rich class or by capitalists. But I agree with you. You know, we cannot, I mean, there are many other countries that are in between, and there are also many differences. But as I said, I don't think that we should go into this varieties of capitalism literature to a great extent. Like, ask a question, where would you put Indonesia, for example? I would tend to put it in liberal capitalism. I would put India there as well. But again, India is also a little bit different. You know, the role of the state is different. The decentralization in India at the state level is much greater than in more centralized systems, politically centralized systems. So, you know, I would not try to put every country and every, I mean, and countries change every year in a pigeonhole.

No, it's a fair question, actually. You know, I took there, okay, my decision is based on two criteria. The first one, they really, first, it's a history, right? So it goes all the, the last individual profile there as an individual is Kuznets, 1960. So I looked first at economists who were very influential historically, and I think that this combination of Kuznets first, Adam Smith next, David Ricardo, Karl Marx, Vilfredo Pareto, and Simon Kuznets indeed represents a group of very influential economists. And I looked at their work on income distribution. Now you say, why there are no Asian economists, and, you know, Indian? The reason is the following. If I were to look at normative part, and as you know, the book is not normative, the book is asking the question, how do you, from each of them, how do you see in your lifetime, what forces do you see determining income distribution, and how do you think, how do you believe income distribution would change with, you know, advancement of capitalism or whatever society that you consider. And if I were to take a normative view, certainly Amartya would be there, but, you know, there will be other people. Rawls would be there, Rousseau would be there. So, you know, there would be other economists there. It would not be the six that I mentioned. And actually, there are two other books that were written at the same time, obviously, but different authors that take that point of view, and they have people other than Smith and Marx. They have very different people. They have Machiavelli, they have Rousseau, they have Rawls, they have Condorcet, they have Amartya, and so on. So that was for the absence of Sen. But then you can say more broadly, why not somebody from the 19th century? I think that simply the fact is the most influential economists were people from the countries that were then at the forefront of economic development, and essentially they defined what economics is for us. And the fact is that, you know, David Ricardo really studied only a problem which is so proper, so limited to the UK, but of course became the worldwide problem in the sense that it actually influenced the development of economic science. So that was the reason, you know, and you can also say there are no women except mentioned in the, you know, Joan Robinson is mentioned and Rosa Luxemburg, but there are no single profiles, and for the same reason that I already explained.

Well, you know, I don't think it's a problem. I think what is changing is that non-Western economists, whether they're working in the West or working elsewhere, like India or China, are becoming much more important. So a book like mine, you know, there are two ways, I think, to actually improve on the book, on "Visions of Inequality." One possibility is to take important economists from the past who are non-Western economists and to look at how they consider the same problem of income inequality. You know, Japan would actually play quite an important role there because they had many Marxist economists who were, you know, I'm talking of more recent, who I know, you know, like Morishima, but, you know, you had also earlier economists. So that could be a possibility. Then, of course, for, I mean, big countries like India or China, although many of them were more social sciences. So that's one possibility. Second possibility is to do the same thing, but now with more recent, you know, last 50 years. There you would have lots of, you know, economists from different countries that would be included there. But if you, I believe, objectively look at the people who influenced development of economic science in and living in, having lived in the 19th century, you really end up with the choice that I made, you know, which you might actually add a little bit there, one or two of people.

Now let me just ask one very brief, the number seven economist whom I actually very seriously considered of including, I'll tell you why I didn't include, would have come after Kuznets, and it was Samir Amin. Now Samir Amin would immediately answer your question why there are no other, like, non-Western. Secondly, I really was very influenced by him, and actually all the six that I put there in the book are people who I've been reading for 40 years. I mean, not all of them 40 years, but certainly Marx, Smith, 40 years. Some year, I mean, I read him in 1975, and I really wanted to include him, and he has a small section because he was the first one, among the first ones, that changed the nature of the game by saying, look, income distribution in a given country is determined by external forces. In other words, it's determined by the setup of the world economic system. And actually, I was going to include him, however, then I started reading his more recent work. I was very, very influenced by his "Accumulation on a World Scale," which was published in 1975. But then I'm sorry to report that, but my impression is that he did not really advance very much. His papers became repetitive. He was no longer empirical, and my book is really looking for empirical part. And eventually, I spent a small section on him, but he did not have the full chapter. Maybe it was a mistake. I discussed that. I said maybe I should have included him, but it answered a little bit your question. I had really a dilemma until probably almost the end of the book whether he should have chapter seven or not.

You know, I think even economists think of Gini coefficient first. I think of Gini coefficient. Gini coefficient is a very powerful and it's a very intuitive metric. It is, as you know, it actually takes incomes of everybody, compares them, makes mutual comparisons, then adds all these distances which exist between individuals, divides them by the number of comparisons that we have made, which is N squared, because of course I compare my income with everybody else and everybody else compares their income, and normalizes it by the mean income of that society. So it sounds like too many things are happening, but eventually what it does, it produces a number which goes from zero to one, with a zero being a theoretical situation that everybody has the same income, and one being an equally theoretical situation that one person or one household has the entire income of that unit. But the number, you know, does make, I think, sense. People are used to that and so forth. Now, of course, there are other measures. You know, there is Theil coefficient, there is Atkinson measure, or you can have measures that would actually focus on one part of the distribution, like the famous top one percent, Piketty, or you can actually take the ratio of the, you know, 10, 20 percent on the top versus 20 percent on the bottom, or you have a Palma ratio, which is also similar. But in my opinion, the problems with these other ratios is that they leave entire, all the rest of the distribution unconsidered. For example, if I tell you the share of the top one percent is X, that's fine, but I have no idea what's happening for the other 99 percent. They can be all bunched together with very small differences in income, or they can be really very much far apart. But I'm not really arguing for one measure. I do use Gini, generally speaking, but, you know, you can use other measures. They have very high correlation between them, so it's not really that one measure will give you totally opposite result.

Let me, yeah, let me be very sort of rough in that sense. Let's look at first, which 99 percent of people look first, is what is inequality in my country, okay? So then we have, of course, again, these Gini coefficients. And if you look first among rich countries, the OECD countries, and compare today's inequality with inequality at the time of the neoliberal revolution or the Reagan revolution, so we are taking basically today versus 1980, approximately speaking, in all, practically all rich countries, you have much higher inequality now than you used to have. That's true for the US, true for the UK, true very interestingly, significantly true for Sweden, true for Italy, true for Spain. There are some countries where the increase is like zero, close to zero: France, Belgium, Austria, Finland, and all of that. And they are generally countries with unusually low income inequality in Gini terms, below 30. So that's really a few countries, including some of former socialist countries like Czech Republic, Slovakia, Hungary, essentially Central European countries that are small, they have fairly equal.

Then you look at the rest of the world. Of course, Africa, very high inequality. India, very high inequality. When you look at income, India is really having South American levels of inequality. When you look at income, when you look at consumption, which is normally something that India has been producing, consumption surveys since 1952, the Gini in India is about 35, which is like moderate inequality. But when you look at income surveys, which have been produced only more recently, the Gini in India is more than 50, which really places India at the same level of many Latin American countries, maybe just below Brazil. So it really depends whether you really... where are some of the OECD countries at? Well, in that case, India is just way above OECD countries in income inequality. So India would be like a Latin American country if you take income, but India has a very large gap between income and consumption inequality. And so that's the issue, whether consumption inequality at the top is underestimated. That's quite possible, but I do tend to believe with these most recent income surveys that India is really a country which has, broadly speaking, Latin American level of inequality, significantly above OECD. The OECD most unequal are Israel and the US with Gini of 40, and India is 50.

Then you come, where does, let's say, China and others, and then China, we come to China. China has higher inequality than the US, not much, but higher. So let me then summarize it like that. You have Latin American countries and Asian countries. South Africa is an outlier. They start at a level of extremely high level of 60. Then you have Latin American countries, most of them, you know, Argentina, Brazil, Peru, Colombia, Dominican Republic, then small countries in Central America, very unequal, like Nicaragua, Honduras, and so on, at 50, 50 plus. India, I would say, at 50. Then you come to China and the US, upper 40s, Russia about 40. Then you go to the average OECD, mid-30s, and then you come to equal countries, which are essentially small Central European countries and a few Nordics, which are about 28. So that's the picture of the world, and for most of them, they are more unequal now than they used to be 40 years ago. But the range, let me put it, the range, the range is from 30 to 60. That's basically where the range is.

That's actually quite interesting because Latin America, which is a continent, as we all know, with very high inequality, practically all countries have high inequality, possibly with the exception of Uruguay. Latin American countries have reduced inequality in the last 20 years. So they have started from very high, they're still very high, but it's a little bit less now. Some people question that. They say, well, if you take the top 1 percent or even 5 percent, it's underrepresented. So even if we do adjustment for that, we do not have an increase in inequality. So Latin America is a very interesting case of a very high inequality continent that has shown a reduction of inequality over these last 40 years. There are debates why it has happened. Some say left-wing governments, some say actually improvements in terms of trade during one period which were not then reversed, and so on. But I think Brazil, there is little doubt that Brazil has improved its income inequality. But when I say improved, it doesn't mean it's good. It is actually much worse than in any OECD country. So, you know, we should avoid, I mean, realize that when we say improvement, it simply means it's a delta change, it's a change. But if you really start by being very, very bad and you improve a little bit, that doesn't make you excellent.

Well, China is a very interesting case, and I spent quite a lot of time with Chinese microdata and also with data that they publish, which are not as plentiful. And we do have problems both with Indian data and Chinese data now, which are actually more severe than 10 years earlier, but I will leave that aside for a moment. But anyway, China in the last 15 years approximately has remained, according to the official data, at that very high plateau of a Gini above 40. But it has remained at that plateau, so it has really not changed. When you look at rural versus urban, the gap between the two has diminished. In other words, that gap which was very high, urban areas in China were much richer...

than rural areas, that gap has diminished, but inequality in both rural and urban areas has gone up. So that's a very complex thing: that rural area inequality goes up, urban area goes up, the gap between the two of them is reduced, and overall inequality stays broadly stable. But we have other things in China, for example. I did a recent paper with the Chinese CS about corruption in China because they published the data, and you actually can see how that corruption of these big guys, you know, what they call the tigers, how that corruption is really concentrated at the top of the income distribution. And given that the amounts of corruption are so large compared to the incomes, you know, the average, the median corruption compared to the legal income that you had is between five and six times larger than your legal income. So that obviously would push you much higher up in the income distribution and would add to the Gini. So the real Gini with that corrupt income is certainly much, well, significantly higher than the Gini that we have with legal incomes. So there are many issues there. China is a super interesting country to study. We do have problems with data, but you know, it kind of sometimes improves, sometimes you have more data, sometimes it gets worse. So it's not a uniform movement towards improvement nor towards deterioration.

You know, India, when you look at the famous NSS, National Sample Survey, which as I said exists from 1952, you see it's actually not very important, a relatively moderate increase in inequality over a period, especially after 1991 and then in the 2000s where you did have an acceleration of growth in India and by many sort of anecdotal or rather less anecdotal impressions and data, an increase in inequality. But on that consumption-based survey, you don't see it. You know, I vaguely remember, but for example, Gini coefficient goes, I'm talking now rural areas, for example, from 32 to 34 to 36, it never reaches even 40. I mentioned the Chinese inequality is about 40, so it seems to be less. Urban areas are more unequal obviously than rural areas, but even there, I looked at, I think, the most recent data a few days ago, and India as a Gini on consumption again is under 40. Yeah, it is. You don't see much of a change or much of an increase. So that's why I've sort of recently become somewhat skeptical about consumption data, and I have started using income data, of which unfortunately there were only two surveys. And when you compare them, they do make sense because first of all, some of the rich people have large savings. So you know, when you look at their consumption, their consumption may be objectively represented in the survey, but they have large savings which they invest, and that of course are not part of consumption, right, but are part of income. And then as I mentioned to you, you have a very large Gini of over 50. So I think 51 was the number. So that gap between consumption and income in India is just to tell you very quickly is 51 versus let's suppose 38 or 37. That gap is then 14 Gini points approximately. That's a very unusual gap. We know that there are always gaps between income and consumption data, but the gaps are about seven Gini points, not 14. So that seems to me to indicate either an extremely high savings at the top income levels or non-participation of the rich in consumption data. So in other words, consumption data is really biased towards the poor and the middle class. And last point, you know, that would not be surprising because the original idea of NSS was to study poverty, especially rural poverty, and to find who are really and where are the really poor people. NSS did not have the objective to find urban rich people. So you know, I think maybe that the frame itself was done in such a way that this result kind of is not unusual.