Why is inequality such a big issue? Why is it so corrosive to societies?
I think it became a big issue, because essentially of the crisis. What the crisis did was make people realise that when, for example, their houses were repossessed, or they couldn’t repay the mortgage and so on, actually, they had to pay debts. They realised that for a long time the middle class in the United States and less so in Western Europe, but still the case, was living well by being able to borrow and/or keeping up with the Joneses. Whereas real incomes have not risen.
Then they have noticed that, of course, some people at the top have done extremely well over that time. I believe that it was realisation of this issue that brought inequality to the fore. Now, why is inequality in general important? I think it is important, even for economic growth. Let me just put it in very simple terms. We know that in societies, where inequality is extremely high, we have a cementing of privileges across generations. We don’t have intergenerational mobility. We have lots of people who are never able to contribute to society by working, or by studying or anything else, because, simply, they don’t have money to actually engage in that.
Very high inequality is clearly not good. On the other hand, we have the example of formerly socialist economies that actually reduced inequality to such an extent that there was no incentive to even work harder or to study. That low level of inequality was unsustainable too and bad for growth. Clearly, I think, that we have to realise that not only there is some kind of optimal level of inequality, but there are two different types of inequality. Just like there are two different types of cholesterol. There is an inequality which is good, which actually, prompts us to take risks, work hard or study. There is inequality, which is bad, which essentially enables an elite to maintain its position without contributing much to society.
Okay, and if you look at the main drivers of inequalities, globally and, also, maybe particular trends within Europe. What do you consider them to be?
Well, you know, globally we have the situation now, that global inequality measured by the standard indicators, like the GINI, is down. Now, it is down because of the increase of incomes and the rise of Asia, essentially, China, India and so forth. However, we are also not capturing well the very top incomes. First of all, because in surveys, these people are few in numbers and they don’t participate, or they reveal incomes that are lower than actual incomes.
Or they try to hide incomes as we have seen in the Panama Papers or now in the Paradise Papers. It could be, when we make some adjustments for that, we actually find it’s very difficult to reverse the decline of global inequality, even after the adjustment. Further, if we were to compare the incomes of the very top with the incomes through the median, then, inequality by that measure, has gone up. That’s about global inequality.
Now, at individual country levels, the situations, obviously, vary. They vary, especially after the crisis. If we take a longer term view, and compare the mid-1980s to today, we see an increase in inequality, practically, in all rich countries. I think in the case of OECD countries, with the exception of two or three, inequality went up everywhere. Then, of course, we see an increase in inequality in China, Russia, India. South Africa, for example, which already had a high inequality, even went up.
The only exceptions to that are countries in Latin America, which are really at a very high level of inequality, like Brazil, but experienced a decline over the last 15 years.
Europe in particular, do you see any specific trends?
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Well, in Europe, the basic trend for all individual countries, again, over that long term, is an increase. We have a situation of countries, like Sweden, that are of course, still hailed as exemplars of social democracy. The increase of inequality in Sweden has been pretty significant. That doesn’t make Sweden an unequal country, but while its level of inequality was significantly below the EU average, it has now converged towards inequality in other countries.
We see inequality increase after the crisis in particular in Spain, Greece, Portugal. Then central European countries, that used to be and remain countries with relatively low inequality, but they are also small countries, very homogeneous in terms of education, ethnically as well. Like, Hungary, Austria, Slovak Republic, Czech Republic, Slovenia, they are countries with relatively low inequality.
If we take a bit of a broader view and link inequality to some of the other key, and dominating issues at the forefront of political debate – namely, globalisation and migration – how do you see inequality interacting with these?
You see, I would actually see globalisation on top. In other words, I would see globalisation as this framework that exists now, because we are now, much more interdependent and interconnected than we ever were in history. When I say ‘we’, it’s just like citizens of the world. Capital flows today much more freely, probably, ever with the possible exception of the end of the 19th century. Labour is somewhat less mobile than then, because in terms of the flows over the population, which existed then, they were bigger than they are now. These flows are definitely increasing nowadays.
Obviously, thanks to technology, we are much more interdependent. The globalisation is, I think that framework, and within that framework we have changes in inequality. Some of them, as I mentioned before, are quite favourable, like a decline of global inequality due to the growth rates of China and India. Some of them, I think, also related to globalisation are unfavourable. That’s the increase of inequality in most of the rich countries, and the hollowing-out of the middle class.
I would really take, as I said, globalisation as the main framework. Now, within that framework, we talk about inequality and we also talk about migration, because migration is simply one of the manifestations of globalisation. That is a very difficult topic, because there again, you find it’s sort of a trade-off between the two levels. You can argue, I think quite persuasively, that greater migration would reduce global inequality. It would certainly reduce global poverty. That’s something which is good.
On the other hand, migration might lead to increases of inequality in some countries, as migrants actually put further pressure on wages, domestically. It might lead to political problems. Basically, there is a trade-off there. We cannot opt, I believe, for the extreme solutions. Free migration would not be politically feasible and then cutting migration to zero, I think, would be economically self-destructive, even for the countries that do do that.
Inequality has also been recently linked to the rise of right-wing populism across western societies. How do you see this particular link?
Yes. They have been linked. I think that there is a consistent, I think, pattern or consistent story that can be told. We don’t have, as of yet, too many empirical studies. Actually, I’ve seen only two. One for the United States and one for Europe. What these studies tend to suggest is that the underlying reason for what is called ‘populism’ or, I suppose, election or support of non-mainstream leaders or parties, was economic. That it was channelled through the cultural channel.
In other words, what I think is that the story which is being told there, is that it arises because of a lack of economic advancement, because of dissatisfaction with economic position, maybe, insecure jobs. Decline in wages, loss of job, for example, for your partner. Inability to send your kids to good schools, because they are expensive. You, of course, have a pool of dissatisfied people. Then they are expressing dissatisfaction by blaming somebody else for what happened.
They could blame the elite, they could blame the Chinese, they can blame migrants, but I really believe, and I think this study has confirmed that actually the main driver is economic dissatisfaction.
It is often seen now, in recent research that is, basically an interplay here of socio-economic factors as well as cultural factors. One of the discussions we had recently with Peter Hall from Harvard showed that even though you can explain a lot of the rise in right-wing populism in the United States and Europe, with socio-economic factors that kind of explanation doesn’t sit as easily with countries such as Hungary and Poland that have had a very good economic development. Nevertheless, they turned towards right-wing populism.
Do you see any sort of cultural factors, that play into this as well?
I think that what is happening in Eastern Europe, an unwillingness to accept migrants, stems from two developments, which have sort of been either neglected or forgotten. One is that all those countries, over the history of the last 200 years and in some cases longer, have been countries that have been in a difficult position, between different powers, and they’ve tried to create their own state – to the extent that’s possible, to have a homogenous, ethnically homogenous state.
This is exactly what we see, what happened, particularly after the end of the communism, the fall of the Berlin Wall. If you look at, for example, Poland, it obviously didn’t happen then, but it happened after 1945. A society that was very heterogeneous, where you had Germans, Ukrainians, Jews and Poles, became 99% Polish. You see that with the Czech and Slovak republics. Hungary was always, after the World War I, homogenous. You see it also in Croatia with the disappearance of the Serb minority.
All these countries became homogeneous. The revolutions of 1989 had a very strong nationalistic element. Now, one is asking these countries to overturn two centuries of history, where they were trying to create their own nation-state, by accepting people who are very different from them. I think this is what is in the background and which explains this reluctance of Poland or Hungary, or indeed the Czech Republic or Slovakia, or any of these countries to accept migrants from outside Europe.
Looking at, for instance, the recent German election result, I know you can see a very big distinction in electoral results between eastern and western Germany. It relates to this, because former Eastern bloc countries do not seem to have an equivalent history of immigration, as for instance, western Germany had after the war with Italian and Turkish immigration to rebuild the country and economy.
The pattern seems to be that the arriving populace seems to be doing well, in areas where there are literally problems, the parallel societies. Also, in areas where there are no immigrants whatsoever. The theory then goes that the people who don’t have a history or experience with immigration, look at the hotspots, think, “We do not want to become like them.” Ignoring the 98% of cases where it just works fine, and therefore you have the manifestation of a cultural rejection. Would you agree with that?
Yes. It’s very difficult to draw conclusions but I really am a firm believer that economics is very important. As I explained, in the case of eastern Europe, I think there is also historical background that matters. Very often, and we saw that in the case of Brexit, we find that the areas with the lowest percentage of foreign-born people have apparently voted the strongest against more migration. That too, I think, can be explained, not only by the fact that, of course, they are afraid of London, for example. I believe that the large cities that have had, as you said, experience for many years, or actually, in some cases centuries, with migrants are actually able to absorb it. They have seen this happen and they were basically functioning very well nevertheless.
Another case is Vienna. Vienna has, for example, I think more than one third of the population which is not Austrian born. In smaller cities, where basically, you have a couple of shops and one cafe or a restaurant, maybe, I don’t know, 50 people or 200 people or 2000 people, I think there is a kind of a fear, that your way of life would be really radically changed by the introduction of a relatively small number of people, who are very different from you.
I think that may be the reason behind more rural areas and smaller areas being, paradoxically, more afraid of migration than the bigger ones.
Yes, Brexit is another good example for this. I think you have a very strong socio-economic explanation for why a large part of the de-industrialised north of England was supporting Brexit. The economic argument becomes more difficult, when you look at Sevenoaks in Kent, which is a rich commuter town.
It seems to be that cultural factors seem to be applied there as well. Towards the end of this, if we can pull it back towards inequality, in the matter of the framework of globalisation and also, maybe, the migration issue which is set to become more pronounced going forward. If you look at the reasons why people migrate and put yourself into the shoes of policymakers, in Europe or even elsewhere, what would your key policy priorities be to address the most dramatic effects?
You know, it’s good that we talked about migration. I’m not, obviously, a migration specialist, I simply came to migration as another manifestation of globalisation. Technically speaking, migration is no different than studying the movement of capital. One factor production, another factor production. There is a difference, because politically it is different. What I would like, if one is to have a policymaker focus, is look at the longer term and particularly for Europe, the question of how to deal with migration. The reason why, I think it’s really so crucial for Europe, is because of two developments. One, is that Europe as we know it now, is composed of countries with generally either stagnant or declining populations.
We know, basically, that Europe will decline in terms of population within the next 50 years. This may not be a huge decline, but it will be stagnation or slight decline. On the other hand, we have sub-Saharan Africa that has about twice as many people as the EU. That ratio will become something like 5 to 1 towards the end of this century. With large gaps, and that’s the second point, large gaps in income which are unlikely to be bridged in any significant manner between now and then. We have really an incredible pressure for migration, which can only get greater and will be exacerbated.
I think the policy makers in Europe should really think about a sustainable, or somewhat sustainable way, and somewhat controlled way, to channel this migration. I believe that should be done jointly by the European Union and by the African Union, probably through some joint financial support systems. I also believe that there should be so-called circular immigration. That people go to rich countries, work there for five years and go back home.
In any way, whatever model one chooses, I think that it’s something that Europe and Africa have really an incentive to look forward to – in the sense of preempting the emergence of the problem, to the extent that it’s possible. Rather than solving the problem every summer, by sending Frontex, more ships and having, of course, all these intra-European issues between, of course, Italy and Greece as recipients on one hand and the rest of Europe.
I really think that’s really something that needs leaders who can think about the future. It would include also, much greater, probably, help for Africa. One small detail there, which ironically may be good for Europe, is that if Chinese investments in Africa are actually bearing fruit, and they help Africa grow faster, that will be good for Europe too because the migration pressure from Africa would be less.
Once more, we see this interdependency of the world there.
It seems to me, especially, in the wake of the refugee crisis in Europe, we have to start by disentangling a few things that are lumped together: one is the freedom of movement within the European Union. The second one is non-EU immigration into European countries and asylum. Especially in the UK, you can see all of these different elements lumped together and it doesn’t help you deal with it.
It seems to me that, of course, we have a strong framework of freedom of movement within the European Union. We need a framework for the discussion. Germany’s is about an immigration law for non-EU immigration.
At the same time, I think you should have an interface between asylum policy and immigration law, because you would like to set an incentive. For instance, if someone arrives as an asylum-seeker their stay might be temporary, due to their legal status. For instance, the Civil War in Syria ends. If that person then fulfils certain criteria, such as speaks the language, is integrated into the labour market and so on and so forth, they might stay or go home. There should be an interface for transitioning an asylum seeker/refugee towards the migration route.
I don’t personally see too many of these interfaces developing at the moment. Would you see that?
I totally agree, and actually, I think that it’s good that you mentioned these three different types. I think with two of them, we have more or less clear rules and migration within the EU is very clear. The UK may not participate in that but the rules, I think, are clear. Then when it comes to asylum, these are international rules which go back to a period between the two wars. There again, the rules are clear. The conflicts, of course, lead to the movements of people. I’m from the former Yugoslavia, I’m from Serbia. Lots of people move from Bosnia, actually, 2 million people, I think, were at some point displaced, internally displaced or actually looked for asylum in other countries.
This was a conflict, but the conflict ended. Then the part which is totally regulated and is very unclear is migration from outside the EU into the EU. There we actually face every summer two issues and we conflate the two things. We conflate Syria with immigration from Bangladesh, Pakistan or Mali, Madagascar, Mauritania, into Europe. These are really two different issues and we have seen, actually, people who claim to be from Syria but they are from somewhere else, because they want to go under the package of the asylum. That’s a different rule there.
I think what Europe needs and I think what African Union needs is that middle part which is really quite defined.
Exactly, because the absence of this clear framework for non-EU immigration, actually sets the incentive for people to claim asylum, even though their immigration might be due to economic reasons. Finally, apart from sorting out migration, which will, I’m sure, be at the forefront of policy discussions in the next three years, are there any other policy measures to address inequality in particular? What can the European Union do and what should individual member states do to address the biggest problems related to inequality?
You know, when we talk about individual countries or individual EU member states, the contrast, which is so obvious for any individual country, is that our incomes are more and more determined at global level, because we are competing, one way or another, with the rest of the world. Many of the jobs even that we are doing, for example, people who give lectures and so on. Actually, they can give these lectures remotely, so you don’t have to be physically present there. Which may be good for some professors who might make, actually, lots of money because their lectures are being listened to, but they put others out of a job.
We are really competing globally. However, whenever we lose, whenever we have a problem with jobs, whenever we have trouble with our incomes or wages and so on we still have to go to the national level because there is no global level. There is a disconnect in some sense. In the past, when the economies were relatively close, your problem, your income, was nationally determined and your problem solver was the national government. Now, national government is merely in the operation of mopping up the issues that are very often raised by globalisation.
The tools are at the level of national governments, so when we talk about taxation, when we talk about unemployment, health policy, they are all national. It is very well known that you can, of course, by increasing the minimum wage, by giving greater trade union rights and so on you can do things better for the labour force. Particularly, what I meant with trade unions, I meant the United States, in particular, not Europe. We have the means to do that, making education much more accessible and so on. They’re at the national level but what nations can do nowadays is limited by globalisation.
There’s this difficulty. Maybe some countries would actually like to increase taxation, but they’re really limited to the extent that they can do that because of tax competition. Because of the ability of capital and labour to move. There is a limit to what national governments can do to solve the problems which arise, in many instances, because of globalisation. That’s where I see this being a very difficult contrast, and that’s why I’m not too critical of the policies because I see policymakers working within a framework, which does not allow them to become more generous to all the population. Simply because becoming more generous would be, in some cases, destructive of their advantage in terms of worldwide competition.
We also have, in the first instance, to solve a lot of collective action problems?
We also huge collective action problems, because there is a collective action problem which is at the global level. We talked today (at a separate conference: Ed), for example, about labour rights, which should be quantified globally. We do have this problem there, because, obviously, the labour rights are very different in different countries. They’re not being quantified, and the role of the ILO has been relatively limited, and we don’t even, as we heard today, very clear knowledge or an index for these rights across the countries. That’s one problem which is an interstate problem at the global level.
Then we have a collective action problem at each individual country level. The two, of course, are interdependent. I believe if we were actually doing better at being nation-states, globally, then part of that collective action problem would be more soluble at the level of nation-state. Maybe it’s too absurd, but one can say the following: if we were to agree on minimum labour rights, then that enables the country then to follow more pro-labour policies because it knows that it cannot be undercut by somebody else. That’s the basic story.
Branko Milanovic is a Serbian-American economist. A development and inequality specialist, he is visiting presidential professor at the Graduate Center of City University of New York and an affiliated senior scholar at the Luxembourg Income Study. He was formerly lead economist in the World Bank's research department.