Branko Milanović is the visiting Professor at City
University of New York Graduate Center and former lead economist at the World
Bank’s research group, where he worked on the topics of income inequality and
globalisation. He is the author of The Haves and the Have-Nots: A Brief
and Idiosyncratic History of Global Inequality.
Hugo Scott-Gall: Is income
inequality on the rise globally?
Branko Milanović: It is important to begin with
a clear definition of global income inequality. The most commonly accepted use
of the term refers to inequality in what all the individuals in the world earn,
regardless of the country of origin. This form of global inequality has been
slightly decreasing over the past 15 years or so. What is driving this decline
is that large and relatively poor countries, particularly China and India, have
been growing significantly faster than the rich countries, like the US. There
are, of course, other countries apart from China, India and the US that feed
into global income inequality levels, but this triangular relationship explains
close to 50% of the variation in the recent decades.
Another definition that is
also used to describe income inequality paints a contradictory picture and
refers to developments on an intra-country basis, rather than a global level.
On these terms, over the last quarter-century, there has been an increase in
inequality in a majority of nations including China, US, Russia, UK and most of
In summary, by and large there
has been an increase in national inequality levels, but if we aggregate
populations from all countries, global inequality has slightly declined.
Hugo Scott-Gall: In practice,
how do economists measure income inequality? And are there inherent
difficulties arising from the quality of data?
Branko Milanović: There are two main methods
employed to measure inequality, each with its own advantages and limitations.
The first measures inequality using household survey data and the second looks
at income concentration using filed tax returns.
Household surveys are used to get
information on income levels from a sample of households, surveyed at regular
intervals. These are produced by most countries. However, in some countries
such as India and Indonesia, income surveys are not available and consumption
surveys are used instead. These national surveys are then combined and adjusted
for differences in purchasing power and prices between the countries in order
to get a real worldwide distribution of incomes.
The second method draws on a
country’s fiscal or tax data, and focuses on income concentration at the very
top of the distribution. For many countries, large segments of the
population do not submit tax returns, and therefore capturing the entire
distribution can be an impossible task. Fiscal data however are significantly
more accurate at measuring incomes at the top percentiles compared to household
surveys because rich people tend not to participate in surveys or underestimate
their incomes. Obviously, the incentive to underestimate incomes exists in
fiscal data too since such information provides the basis for taxation, but
experience shows that, in rich countries at least, tax evasion is less of a
problem among the rich than the sheer unwillingness to bother with surveys. Tax
data are available for some two dozen countries only and they cannot be used to
generate global statistics.
It is also important to
remember that focusing just on the top earners does not provide a complete
picture of income inequality within a country. There are scenarios when there
are income increases at the top and the bottom, but declines in the middle, and
while the results obtained from top income shares only would imply further
concentration of incomes, inequality measured by Gini coefficient might
register a decline. But over the past 30
years, in the US and elsewhere in the rich world, both top income shares and
overall Gini have gone strongly up. So, the two methods come to the same
Hugo Scott-Gall: For countries
that are rapidly developing, is higher income inequality a necessary
consequence of growth?
Branko Milanović: From a historical perspective,
there is evidence of a relationship between inequality and growth, drawing on
periods such as the industrial revolution in the UK and the US. Inequality
significantly increased during these growth phases. Peak levels of income
inequality in the UK were reached around the 1870s, while in the US it was in
the 1920s. The Kuznets curve, formulated in the 1950s, is based on the hypothesis
that as an economy grows and industrializes, market forces at first drive
increases in inequality, and after a certain income per capita threshold is
reached, inequality begins to fall.
But the evidence has been
mixed more recently. Although the Kuznets theory has not been rejected
completely, it is perhaps too simple to conclude that inequality is a necessary
condition that accompanies industrialization.
For sure, China’s growth phase has broadly conformed to this pattern as
inequality has risen during the period over which real GDP per capita experienced
a sixteen-fold increase (between 1980 and 2012). However, during Korea’s
development phase, rapid growth was accompanied by reductions in inequality. So
was it in Taiwan, which experienced land reform and equitable privatization after
The direction of causality
between income inequality and economic growth, as well as whether the sign is
positive or negative, continues to be one of the most hotly contested
relationships in economics. The Kuznets theory makes the case that the
direction is from economic growth to the changes in inequality. But it is also
possible to look at the reverse relationship, how inequality influences
In the 1990s in particular there
have been numerous studies that have looked at this relationship; some arguing that
inequality has a positive impact on growth, while other found a negative
influence. Classical economists would argue that there is a positive
relationship, as those with higher incomes save more and these savings finance
investment which lead to higher growth. At the other side of the spectrum, it
is argued that inequality increases pressures for redistribution because with
higher inequality there are more poor people and they have an incentive to vote
for higher taxes simply because they gain more from social transfers than they
pay in taxes. If you then also believe that higher taxes are bad for growth,
there is a relationship from higher inequality to low growth. But neither of
these approached found strong empirical support and this type of literature
waned until very recently.
But now I believe this type of
research has just begun to explore new options as a result of access to much larger
pools of data, and economists’ understanding is becoming far more nuanced than
15 or 20 years ago. Analysis today is no longer limited to looking at the
relationship simply between an overall inequality index like Gini and the
growth rate, but at pin-pointing the variety of impacts that inequality might
have on different segments of the population, i.e. poor, middle class and rich.
It is in my way a much more promising way to look at the issue. It would also
take us away from the inconclusive black-and-white approach to inequality. For
some things, and up to a certain point, inequality may be good. For other
things, and beyond a certain point, it
may be bad.
Hugo Scott-Gall: What role
does ageing demographics play in increasing inequality?
Branko Milanović: Demographics certainly plays
an important part. In general, an ageing population means increasing demand for
social transfers that redistribute income from those who are employed to those
receiving pensions – leading to a reduction in inequality. From an accounting
perspective, unless this transfer is accompanied by an increase in productivity,
there is a reduction in growth.
However, demographic shifts
take place slowly and are constantly offset by many other elements impacting
the labour market. For example, in countries such as Spain where
unemployment levels are close to 25%, a return to higher employment would obviously
increase incomes and may reduce income inequality.
Hugo Scott-Gall: Have we
reached levels of income inequality where society’s tolerance level is being
Branko Milanović: Increasing income inequality
eventually leads to political pressures, but at present, I do think that
people’s concerns that it might lead to dramatic political changes are exaggerated.
I do not foresee catastrophic events. However, I believe that the current
situation has led to two problems, which I call the tale of the two P’s. Both
elements can be found in all democracies, but have become more prominent and corrosive
in recent years.
The first is plutocracy, some
of whose features are present particularly in the US. The need for
politicians to fund future campaigns has been met by monies coming from special
interests. These relationships have led to the politicians being beholden to lobbies.
As we know from Adam Smith, special interests are special because they never
have interest of a community, but their own only, in mind. This however is not
a new phenomenon and was seen in the US even in the 1920s. It is just worse
The second risk is greater
populism, and this has manifested itself especially in relation to immigration
policies in Europe. The response by European countries has been emblematic of
lower economic growth experienced after the financial crisis. Post 2008,
stagnant or declining incomes in most countries were not accompanied by an even distribution of the
loss. For example, Mediterranean countries such as Greece saw real incomes at
the top 1% experience minimal changes at a time when GDP decreased by 15%, and
when the poor and the middle classes lost even more. As a consequence, there
has been a tendency for political systems to assuage the middle class by using
immigrants as a scapegoat. These are indeed difficult challenges faced by the countries
that are adjusting to a slower growth environment, and if they are unwilling or
cannot go after some of their own rich, they go after the immigrants. The US
has been slightly different because it has a long history of immigration, and
despite the fact that there is an anti-immigrant movement there, it is not been
as sharp as the one in Europe.
Hugo Scott-Gall: Has greater
transparency enabled by widespread access to the internet changed attitudes?
Branko Milanović: I'm not going to exaggerate
the importance of smartphones in revolutions, but there are many examples where
technology has played a role in raising awareness of the extremes in
inequality. The revolution that took place in Tunisia was triggered by WikiLeaks,
which reported on the spending habits and luxurious lifestyle of the now
deposed leader, Ben Ali. Even though people would have been aware of his
extravagance, there is a difference in impact from being told this as a gossip
to being discussed and reported all over the internet.
What are the solutions available to leaders of Western countries who may have
been mandated by the population to address inequality?
Branko Milanović: Unfortunately, I do not have a
very strong or original answer to this
question. For example, although more widespread and better education is not a
panacea, it is certainly a policy that boosts economic growth and helps address
income inequalities. A broader-based educational system equipping the
population with a wider set of skills creates a more productive and flexible
labour market (this is, I know, somewhat of a cliché but may nevertheless be
true). Also, a more educated population reduces the premium that very highly
skilled individuals receive which creates a win-win proposition for both growth
Taxation is another tool, but its
impact on growth is much more ambiguous. Implementing tax policy change is constrained
by the fact that capital is very mobile, and for a single country or even group
of countries such as the OECD it is a difficult task to accomplish
single-handedly. This has been the underlying hurdle which has scuttled proposals
for worldwide taxation on capital or the Tobin tax levied on financial trading
Also, there has been an
ongoing debate in the US on increasing the minimum wage. The US minimum wage in
real terms is below the level it was in the 1960s, whereas GDP per capita has
increased by almost 2.5 times.
Hugo Scott-Gall: Countries and
cities that are highly specialised in specific industries can witness
large differences in incomes across the population. Is wider income inequality
inevitable under these circumstances?
Branko Milanović: I agree that there are
many economies located across the globe that are highly geared to a specific
sector and have been especially successful in attracting global talent. For
example, the state of California ranks as one of the most unequal states in the
US, but it is incredibly successful at bringing together highly educated
individuals, as well as people from different portions of the income spectrum
including low-skilled. I do believe that high inequality in technologically
driven or other successful economies is acceptable to the extent that it allows
for movements up and down the income ladder, within and across generations. But
absent that high mobility, high inequality which carries over several generations,
eventually leads to marked inequalities of opportunity and that is certainly