Monthly Archives: December 2016

The 2016 Globie: “Global Inequality”

Each year I name a book as the “Globalization Book of the Year” (also known as the “Globie”). The selection is a recognition of its author’s contribution to our understanding of the causes and effects of globalization. There is no money attached to the prize—recognition is the sole reward. Recent winners can be found here and here.

This year’s awardee is Global Inequality by Branko Milanovic. The book has received a great deal of well-deserved attention for its analysis of how inequality has evolved in an era when goods, services and money—but not people—have been able to cross borders more easily than during any other period since the first era of globalization of 1870-1914. The returns from these transactions, Milanovic demonstrates, have been distributed in a very unequal fashion, which has changed the global distribution of income.

A graph of the gains in real per capita income over the periods of 1988-2008 (see here) shows that those at the bottom of the distribution of global income received some increases. But income rose more quickly for those in the middle percentiles, the 40th to the 60th. This group includes one-fifth of the world’s population, most of whom live in Asia, primarily China and India. Growth in those countries elevated their middle classes to become the world’s middle class. However, despite these advances these “winners” of globalization would still be considered poor by the standards of the upper-income countries.

The other group that recorded large gains during this period comprises the world’s richest people, the upper 1% whom Milanovic calls the “global plutocrats.” Their gains shrink if the data are extended to include the global financial crisis and its immediate aftermath. Nonetheless, this relatively small group benefitted enormously from the expansion of the global economy. While they are located around the world, one half of this group lives in the U.S.

The intervals of the income distribution space between the global middle class and the top 1% include the “lower middle class of the rich world” in Western Europe, North America, Oceania and Japan. They saw few gains during this period. Consequently, the benefits of globalization were skewed to those who knew how to benefit from it. Inequality as measured within countries increased in recent decades in the U.S. and other upper income countries.

What about the “Kuznets curve,” which predicts rising and then falling inequality in a country over time as it develops? Milanovic extends this concept to “Kuznets cycles” with alternating increases and decreases in inequality. Since the Industrial Revolution, wages have generally increased as income has grown in the advanced economies. But inequality also increased as the manufacturing sector with its higher wages attracted workers from the rural sectors. Inequality subsequently fell during the twentieth century  due to “benign forces,” which included increased education and government policies as well as “malign forces,” such as wars and civil conflict. That downswing ended sometime during the 1970s-1980s, and the upper income countries commenced on a new upswing that Milanovic attributes to a new technological revolution and globalization.

What does the future hold? Milanovic is careful in framing answers to that question, but emphasizes two main trends. The first is convergence, the diminution of the gap in income between poor and rich nations due to higher growth rates in the former as they catch up with the latter. If it continues, then global inequality will shrink. However, not all poor countries have recorded relatively higher growth rates, and African nations have recorded relatively lower growth rates. Overall, though, Milanovic judges that global convergence is more like to continue than to reverse.

The other trend to follow is inequality within countries. Milanovic writes that “…inequality in the United States is either still rising or is about to reach a peak of the second Kuznets wave.” The same pattern is found in other upper-income nations. How can these countries further the reversal of inequality? In the past inequality was lowered through government measures that included increased taxation and social transfers, as well as episodes of hyperinflation and wars. But increased taxes are harder to impose in a global environment. Milanovic, therefore, urges equalization in assets and in education. The former can be achieved through high inheritance taxes, corporate tax policies that distribute shares of ownership to workers, and tax and administrative policies that enable the poor and middle classes to hold financial assets. State-funded education is needed as well to equalize educational returns across all schools.

In the current political environment, however, elected officials seem more interested in reducing inequality by upending globalization. In the U.S., President-elect Trump has made renegotiating trade deals a top priority. Congressional representatives are looking at changes in the tax code that would encourage exports and discourage imports. The incoming Attorney General, Jeff Sessions, has hard-line views on migration. Moreover, the new Secretary of Education, Betsy DeVos, is an advocate of charter schools, not public schooling, while estate taxes may disappear as part of an overhaul of the tax system that will benefit the wealthy. In Europe, the government of Great Britain and officials of the European Union are preparing to negotiate the terms of Britain’s withdrawal from the EU.

Milanovic’s book provides a valuable perspective on inequality. It shows that there has been an historic turnaround  in inequality across national borders after a long period when Western countries kept drawing ahead of other nations. But inequality within many nations, including some emerging market economies, has risen. The challenge is to reverse the latter movement without offsetting the former. How countries deal with this challenge has become the dominant political issue of our time.

Milanovic ends his book by posing the question: “Will Inequality Disappear as Globalization Continues?” His answer: “No. The gains from globalization will not be equally distributed.” Milanovic deserves credit for putting that issue squarely on the global agenda.