Sarah Byrne, Advisor Local Governance and Civil Society, HELVETAS Swiss Intercooperation
Questions of inequality are increasingly high on the global academic and policy agenda – this shareweb's newsfeed is but one indicator! Organisations from Oxfam to the IMF have recently published analyses of global wealth data and are weighing in on the causes and consequences of inequality at a global scale (1). Economist Branko Milanovic has been working on the topic of inequality since well before it became popular and recently shared his views in a keynote address at a conference on inequality organised by the Swiss Network for International Studies and the ETH. In his lecture, Milanovic addressed the question of recent trends in global income inequality and their political implications. Global income inequality refers to income inequality between world citizens, in whatever country they may reside.
Trends in global income inequality
With respect to trends, Milanovic highlighted a number of key points. Firstly, global income inequality is extremely high. The Gini coefficient (a measure of inequality) globally is estimated at 70, which is significantly higher than even the most unequal individual countries (2). Further, some 75% of global inequality is due to living in different countries: a high percentage of global inequality in incomes can be explained simply by the country in which a person lives. For example, a person who is middle class by Swiss standards is still among the richest income percentiles globally (3).
Secondly, while income inequality is on the rise within countries (with the exception of some highly unequal countries like Brazil), Milanovic suggests that globally, income inequality has slightly reduced. This, he suggests, can be attributed to Asian countries "catching up." An increase in incomes in Asian countries with high populations, such as China, India, Indonesia, etc, moves large numbers of people out of the global lowest income percentiles, thereby reducing global inequalities. The average Chinese citizen is in a higher global income percentile than they were 20 years ago.
A third key trend is the significant growth of an Asian – and specifically Chinese – middle class. This is illustrated in the following graph:
The vertical axis represents rate of growth in incomes between 1988-2008. The horizontal axis represents percentiles of global income distribution – from the lowest incomes on the left to the highest incomes on the right. The graph shows that the highest growth rate, indeed almost a doubling in incomes, took place around the global middle income category. This growth has been driven largely by growth in emerging large Asian economies. It should be noted that this global middle class income category is still quite different from the experience of middle class incomes in wealthier countries. This new global middle class is situated just above the global poverty line.
The other very high rate of income growth was experienced by the world's wealthiest people. This is the fourth significant trend – the already very wealthy (global top 1%) continued to grow their incomes at a significant rate.
In contrast to this very high rate of income growth, people in the 70-95th global income percentiles experienced little or no growth in their income. This percentile refers to the lower part of the income distribution in OECD countries, particularly the United States, Germany and Japan. This is the fifth major trend Milanovic highlighted: the high growth in Asian middle class incomes seems to be paralleled by a stagnation in incomes in OECD countries. In other words, the middle class in wealthier countries is not growing. This, as Milanovic noted, raises the interesting and politically important question of whether these two trends are causally related or just happening at the same time.
What can be done to reduce income inequality at a global scale?
Noting that there are a clear set of measures that can be implemented to reduce inequalities within countries (taxation, public education and health care, etc), Milanovic pointed out that there is no global government to put in place a taxation and re-distribution system at a global scale (4).
What, then, can be done at a global scale? Purely from an economic point of view, there would be two ways to decrease global inequality. The first is that poor countries would need to grow faster, bringing incomes closer to those of people in wealthier countries (as has already been the case with China, as noted above). As incomes stagnate in wealthier countries, this would result in a kind of convergence.
The second way to reduce global inequality, suggested Milanovic, is international migration. Simply by moving from a poorer country to a wealthier country, an individual increases their income earning potential. Thus if we look at inequality in incomes between people across the globe, movement from poorer to wealthier countries can increase individual incomes and thereby decrease overall inequality between world citizens. Furthermore, remittances from migration can also contribute to reducing poverty rates in "sending" countries (i.e. Nepal).
Political implications of the trends in global income inequality
What are the political implications of the above-outlined trends? In his presentation Milanovic highlighted a number of key issues. Firstly, there is the question of citizenship. Global income data shows that people who are born in rich countries have a higher income over their lives than those who are born in poor countries? Milanovic asks: is this morally justifiable? Do we accept that equality of opportunity ends at national borders? Secondly, Milanovic suggests that the large gap between average country incomes is the cause of much global migration. The political implications of this economically-motivated migration are of course being played out on the front pages of newspapers, and in social media, across Europe at the moment.
Milanovic also noted that there may be political implications of the growth of the Asian middle class and stagnation of the middle class in wealthier economies. In the latter case, the resentment of the people who have seen no growth in their incomes over the past 25-30 years. And in the former case, possibility heightened expectations for political participation of the new middle class.
You can watch an introduction to Branko Milanovic's presentation here: