Is Your Income Tied to Your Citizenship?

World expert on income inequality, Branko Milanović, at IESE colloquium

25/06/2015 Barcelona

Branko Milanović
Branko Milanović: “Everyone born in rich countries gets a location premium or location ‘rent’, while those born in poorer countries get a location penalty.” / Photo: IESE

Are countries like the United States heading towards plutocracy? Will increasing income inequality stifle growth? What does the future hold in store for the economically disenfranchised?

And what, if anything, can be done to arrest the march of inequality across the globe?

Branko Milanović, one of the world’s top scholars in global income distribution, was the keynote speaker at the 14th Colloquium Public Service-Private Management at IESE this month. He opened the lid on the growing social and economic implications of the phenomenon, described recently by Federal Reserve Chair, Janet Yellen, as being "long of interest to the Fed."

Former Lead Economist at the World Bank’s Research department and currently Senior Scholar at LIS Center and Visiting Presidential Professor at The Graduate Center, Professor Milanović delivered a talk entitled "Trends in Global Income Inequality and Their Implications."

He was introduced by IESE Professor of Economics and Financial Management, Xavier Vives, who laid out some of the major challenges posited by increasing global income inequality:

  • China, India and the emerging economies are increasing the supply and flow of low skilled workers, which is having knock-on impact on workers in more developed economies.
  • With a weakening global economy, economic instability and low levels of innovation, the current situation is similar to that in the 19th century US when antitrust laws evolved to control market power.
  • The trend to increasing global income inequality could represent a challenge to democracy and has the potential to lead to oligarchies if economic power becomes too concentrated at the top.
  • The situation has a strong ethical dimension, with growing proportions of the world’s population confined by inequality of income, education and opportunity.

He quoted remarks made in October by the Fed’s Janet Yellen, who stressed that while the wealthiest five percent of Americans hold two-thirds of all assets, things have been "stagnant" for the majority.

Yellen questioned whether this trend was "compatible with the value of equality of opportunity rooted in US history."

Income: Tied to "Citizenship"

Professor Milanović observed that the phenomenon of a rapidly growing Asian middle-class might, in combination with middle-class income stagnation in some of the richest countries in the world, trigger the emergence of a "new global plutocracy."

The global dimension, he said, is inseparable from the national, or "inside-country": "National inequalities are the building blocks for global inequalities - and they need to be seen in the context of median income inequalities across the world."

Milanović shared a graph showing income inequality in individual countries, within the larger context of global income inequality. And the findings are significant:

Branko Milanovic, “The Haves and the Have-Nots,” p. 116. Branko Milanovic, “The Haves and the Have-Nots,” p. 116.

  • The entire ‘line’ for the US sits in the top section of the graph, which means that America’s bottom ventile is effectively "richer" than the majority of other countries.
  • And despite economic growth, in China those of median income – the so-called Chinese middle class – are equivalent to income groups at the bottom of the US income chart.
  • Meanwhile Brazil’s ‘line’ cuts right across the chart from bottom to top, meaning that Brazil has the broadest span in terms of income: from the very poor to very rich.

In today’s world, income is tied to "citizenship," said Milanović. "Everyone born in rich countries gets a location premium or location ‘rent’, while those born in poorer countries get a location penalty."

The Impact of Income Inequality In-Country

Migration is increasingly becoming a function of globalization and in-national inequality, said Milanović. And it’s a affecting a growing number of countries.

The GINI coefficient, which represents the income distribution, has risen to 70 percent globally. This could be likened to 70 degrees Celsius, said Milanović; a situation that is "as uncomfortable as it is unsustainable."

Government redistribution through things like taxation or monetary policy has some potential to mitigate the problem, and stop it from rising. However, with globalization, the mobility of labor and capital markets, and the exigencies of the welfare state, the affluent few can increasingly "just move elsewhere."

Milanović noted that state mechanisms were being applied in countries like Germany (unlike the US) to redress imbalance, but were yielding mixed results.

"Government intervention alone is not enough," he said.

He called for a "broadening" of ownership, measures to encourage smallholders, and a wide-spread ease of access – and return to – education, especially in regions like Europe where political complexities make it "harder" to address income inequality than countries like the US.

"Easier access to education, more equal returns on investment … there are measures open to organizations and institutions that can make a difference and ensure that the spoils of the system don’t always rest with a self-perpetuating ‘elite.’"

The Global Outlook: From ‘Where Are You From’ to ‘What Do You Do’?

As citizens in emerging economies like China become richer, we could see a restructuring of the world’s income across the globe, said Milanović. As well as a possible return to levels similar to the pre-industrial revolution when Europe and Asia were on a roughly equal footing.

"The question used to be: ‘What do you do?’ Then it became: ‘Which country do you come from? As China and other developing countries start contributing their own ‘middle class,’ ‘super staff’ and rich elite to the mix, the question is increasingly likely to be ‘What do you do?’ again."

All well and good, says Milanović, but it doesn’t solve the "really big topic" of the correlation between high inequality around the world and its negative impact on growth. A stagnation that, he says, will hit not only the "poor" but the "middle classes" with worrying implications for Western democracies in particular.

One step in the right direction is the move towards formalizing income inequality as an academic discipline in its own right – with a place in schools’ curricula. This is an idea that is gathering traction and support in the global academic community.

"The recession changed things. With the recession, income inequality suddenly penetrated into people’s consciousness and economists’ professions. Six or seven years ago things changed."