Branko Milanović in conversation with Shalini Randeria on patterns, causes and remedies for global inequalities
On 16 April Branko Milanović was invited by the Albert Hirschman Centre on Democracy to a public lecture on the evolution of global income inequality.
His coming to the Graduate Institute Geneva gave Shalini Randeria the opportunity to interview him on the political implications of global inequality. Shalini Randeria is Director of the Albert Hirschman Centre on Democracy and Professor of Anthropology and Sociology at the Graduate Institute Geneva and Rector of and Permanent Fellow at the Institute for Human Sciences in Vienna. Branko Milanović pleads for an egalitarian capitalism which comes from a relative equality of endowments.
Shalini Randeria: Why is it that economists have got interested so very late in the question of inequality; they seem to have discovered the problem only in the last decade? Equally surprisingly the World Bank, the institution where you worked for over 10 years, also seems to have discovered the problem of inequality only recently though it has had a sustained interest in poverty.
Branko Milanović: These are really excellent questions, because they go straight to the political, or even ideological, side of the issue. In the case of economists — of course, if I may generalize as there are always some exceptions — in the general the problem was that when you have a general equilibrium framework at the back of your mind all the time, the two things which matter for inequality, prices of the factors of production and endowments of the factors of production, are really outside of your realm of study. Let me explain. Prices, such as wage and return on capital, are determined in the market system, whether you like it or not. And how much capital or labour you have is something, which is outside of the system: you come to the market as if it were with your endowments. Economists thus took both prices and endowments as given because they did not consider these to be within our disciplinary purview. So that essentially meant that inequality or income distribution have been almost totally left aside by the discipline. When I started writing in the 1990s on the subject of inequality, the topic was quasi non-existent in economics journals. At the time there were no reference to “inequality” as a key word in The Journal of Economic Literature classification so you had to use keywords like welfare, education, etc.. One had to be inventive because inequality did not exist!
Branko Milanović is Visiting Presidential Professor and LIS Senior Scholar at the Graduate Center of the City University of New York. He has also worked as Lead Economist in the World Bank’s research department and is the author of The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality and Global Inequality: A New Approach for the Age of Globalization (Harvard University Press, 2016).
As to your question with regard to the World Bank, I have an interesting story. The World Bank too ideologically worked much more on poverty than inequality because poverty was seen as a “sexy topic”. Everyone liked to be seen then as someone who helps poor people. As a friend of mine said once, “whenever I ask my board members to fund a project that deals with inequality, they always think that I am after their money. When I ask them to fund a project regarding poverty, they all agree and think very highly of themselves”.
When I was working at the World Bank I worked on the unique set of data there using it to measure global inequality for the very first time. I worked almost entirely on my own with hardly any research support and almost zero additional funding from the special World Bank Research Fund that dispenses literally hundreds of thousands of dollars to help researchers. But I also worked without any hindrance. No one thought that the topic of inequalities was of any relevance or importance so I was left to work on the data as wanted to. How times have changed!
You are right, inequality leads us immediately into the world of the rich. Class differences and wealth inequalities are so much more difficult to study than poverty that only needs access to the world of the poor. The lives of the poor are so much easier to gather data on, while the rich are most unlikely to grant one access to study wealth. But I would like to turn to another aspect of your striking findings on inequalities, which is among the most surprising for me. Your research has shown how global inequalities have changed over time. You have argued convincingly that inequalities of income matter. You have analysed the nature and patterns of class-based inequalities, but one of your most striking findings is that location matters. One’s birthplace will determine one’s life chances and income much more than any other factor. Can you explain this unexpected finding?
Yes, I too think that it is one of my most striking findings, and since I published it it has gained ever more in popularity over time. Essentially, when you put people – all the people in the world from every country in groups of percentiles, from the poorest 1% to the richest 1% for each country—and ask the simplest possible question in the simplest possible regression: how much of the total income of these groups can we explain by one variable, that variable being the country of birth, you basically get an answer of 0.6. This is extraordinary! To put it differently, 60% of your lifetime income is determined by your place of birth. I then combined this with some estimates regarding intergenerational transmission of income, namely, where in the income distribution were your parents etc. and it turns out you can explain 80% of one´s income by these two factors: your country of birth accounts for 60%, your parents´ income position for another 20%, and what remains is 20%, which could be explained by effort, luck or whatever else is the residual (gender, race).
I also want to mention in this context that when I talk these days about migration, I immediately point out this fact because people need to realize that migration is really a result of these differences in income. It is the product simply of the accident of the place of one’s birth.
That is precisely my next question. If place matters above all in determining my income, then the only rational strategy would be to move to a place where the wages are higher, that is to move from a lower income country to a higher income country. But here you make a recommendation, which is important and controversial. You advance an argument in favour of migration, but you advocate giving migrants only limited rights in the host country. Many liberals or people on the left will have a problems with your position that we should let more people into the country, but accord them limited benefits along with temporary rights of residence for a certain period rather than the right to acquire citizenship over time. Could you explain why you take this rather provocative position.
Yes, it is a very provocative and controversial position. As you have said, some people don’t agree with such a position though in my opinion on mistaken grounds, a point I will come to in a moment. I make the argument for limited rights and benefits for migrants starting from the premise that migration should be treated the same way as capital is treated: as a factor of production whose movement in the age of globalization should be entirely free. So, if we have globalization and we have freedom of movement for capital, we should have freedom of movement for labour. But then, I run into a problem. The recipient countries, more precisely the populations of recipient countries, are unwilling to entertain this idea. We can insist forever that migration will be good for the overall economic growth and for the overall reduction of poverty and inequality, and even for growth in those recipient countries themselves. But if the population in recipient countries are against accepting migration, then there is little we can do about it. We simply have to take that into account. Having taken this resistance into account, I came up with the proposal that you mentioned, which is controversial. It is a proposal to limit the civic rights of migrants in order to get the domestic population to accept more migrants. It is really a trade-off. I say, essentially, that in Switzerland, Austria, Germany populations would be more willing to accept migrants if one guarantees that they would return home instead of being offered a path to citizenship. When this negative relationship is established (less rights, more migrants), I am really arguing in favor of it not because I am so much in love with it but in order to avoid with an outcome that would be zero migration. It is actually a defence of migration but in a counterintuitive way.
So in your view according differential citizenship rights in host countries is the price one will have to pay for allowing significantly larger numbers of migrants to enter Europe and the USA?
Yes, that is the rationale. Once you accept that there is a negative relationship between the two, then perhaps one could say: well, maybe people in rich countries would accept more people from outside if they were given lesser rights. This is the key point. I come to it from the premise of freedom of movement of labour, as I just noted. However, I do so taking into account the actual political reality.
Branko Milanović at a lecture organised by the Graduate Institute’s Albert Hirschman Centre on Democracy on globalisation, inequality and the powerlessness of policy.
The second argument that you make is similar to Piketty’s, namely that one way to get more equality, more redistribution, would be through higher taxes, i.e. higher inheritance taxes, higher corporate taxes. Do you see any political purchase for these suggestions in the current climate of opinion?
Not much, I don’t, but I am not totally pessimistic on that. We need now a different sort of vision of capitalism. We have had a vision of capitalism with a lot of redistribution of the current income through taxes and transfers. That doesn’t work as well today as it worked in the past. People simply don’t want to pay taxes as levels at which they were willing to earlier. Perhaps because they are less trustful of governments.
There is a growing tendency for everybody to be in favour of lower taxes including those low income groups, who would benefit from higher taxation for the rich.
Yes, absolutely. This is why I think the vision needs to be changed. It has to be a vision of a more egalitarian capitalism, which comes from a relative equality in endowments. The actual emphasis should be on de-concentration of capital ownership. That would mean to make the middle-class more involved in ownership of capital assets. Not only housing, but financial assets. By giving them, the middle class, different tax advantages if they invest in financial assets and taking away these tax advantages from the larger investors.
Your proposal seems to go in the same direction as Hernando de Soto’s idea of assets ownership, which he wanted to equalize more. But he was arguing for giving the poor in developing countries greater access to asset ownership, whereas you seem to be arguing rather for an East-Asian model of capitalism.
That is correct. But let me add one thing. Let’s suppose, theoretically, that you have more or less equal endowments of financial capital, housing and human capital, i.e. education, across the population. Obviously, not entirely equal, but much more equally distributed in all dimensions (capital, skills) than today. Then you don’t need a huge redistributive state. And that’s the point, which is crucial. In such a context, you will have capitalism, libertarianism and communism together. In other words, you have equality, capitalism and market economy, but you don’t have much of redistribution of current income. You can do it all with a much smaller state. This should be really a different way of thinking regarding the future of capitalism, or rather of the capitalism of the future, compared to what it is today.
I was just going to come to that. Actually, we are looking at the wrong units and comparing the wrong units, when we speak here in terms of nation-states. Because it is actually the rich across all countries in the global North and South, who are the main polluters.
Absolutely true. Unfortunately, we are still prisoners–or rather, our tools are still prisoners – of what is called “methodological nationalism”. Essentially, all our calculations are done at the level of nation-states, all our knowledge is about different factors within nation-states. For example, when I go back to the earlier question about how much income is determined by where you are born, this was not a question which you could even ask at the level of a nation-state. Because at the level of a nation-state you just compare incomes of different people, while absolutely disregarding the fact of the state. It is actually a movement from the nation-state to the global level, which yields very different answers, and which also necessitates very different tools. And that’s the case with regard to climate change: all the debate, and the commitments etc. are at the level of the nation-state which is indeed a wrong level for this type of problem.
That is why I thought that your book was one of the most interesting critiques of Rawls’ idea of equality in one country.
Some political philosophers have, of course, written about that and criticized Rawls for his Law of Peoples. It is striking that the same arguments that he rejects very vehemently and strongly in Theory of Justice are then repeated in the Law of Peoples as absolutely acceptable. Basically, when he moves from the nation-state to the world level, it is as if he forgets about the arguments he made originally. The two books are in this sense quite fascinating opposites.
First published on 24 May 2019 on graduateinstitute.ch.
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