On Milanovic's Idea of World Inequality
| Published date | 01 May 2013 |
| Date | 01 May 2013 |
| DOI | http://doi.org/10.1111/1758-5899.12033 |
| Author | Pietro Reichlin |
On Milanovic’s Idea of World Inequality
Pietro Reichlin
Professor of Economics, Libera Universita Internazionale
degli Studi Sociali (LUISS), Rome
The world distribution of income has received a lot of
attention over the last 10 years, and we must admit that
many discussions about inequality are characterised by a
lot of confusion. Although inequality is a fairly easy con-
cept when treated at a superficial level of analysis, it
becomes a very complex issue when we try to assess it
in more depth. A common perception is that the world
is experiencing a period of growing inequality since the
intensification of the globalisation process, labour migra-
tion and rising competition from emerging countries. Is
this perception real?
Milanovic divides income inequality for the world pop-
ulation into two components: inequality between coun-
tries’per-capita GDP (possibly weighted by population)
and inequality within countries. The first component has
been growing during the last two centuries, mainly
because of the technological progress advanced by the
Industrial Revolution, but started to decline in the last
two decades because of globalisation in trade and tech-
nological transfers (foreign direct investments in emerg-
ing countries). Transfers of technology, know-how and
business models from advanced to emerging economies
take place at an increasing pace and allow for a rapid
assimilation of poor regions into the world markets. This
implies that the speed at which poor countries will be
able to catch up with more advanced economies is
increasing over time. Despite this, we still have a wide
gap in per-capita incomes across countries, which is not
likely to disappear very soon. The speed of technology
transfers is not a sufficient condition for convergence.
Lack of human capital and bad institutions are probably
the most important factors behind the poorer countries’
difficulties in catching up with the western hemisphere.
Inequality within countries is a more complicated phe-
nomenon. For emerging countries, we may look at the
famous Kuznets hypothesis, which posits that investment
opportunities for those who have money multiply early
on in the development process, while wages are held
down by an influx of cheap rural labour to the cities.
Whether this hypothesis is still valid is the subject of
debate among economists and political scientists. We
have seen rising income inequality in China and India,
but not in Brazil, where poverty has been reduced
substantially. It is possible that democracy and economic
freedom may be an important factor in avoiding exces-
sive income polarisation. The quality of institutions and,
primarily, the absence of excessive barriers and protec-
tions against competition may also be significant.
In developed countries, we have seen rising income
inequality, mainly in the Anglo-Saxon world, both at the
top (the super-rich) and at middle levels of income. Glob-
alisation (excess world labour supply and low skilled
immigration) and skilled-biased technical change seem
to be the most important reasons. If the latter hypothesis
is true, we have to admit that some inequality is a price
we have to pay to have a more productive economy.
Overall, I agree with Milanovic: inequality today is
mainly the result of location. We may be impressed by
the fact that 50 per cent of the US GDP goes to the rich-
est 22 per cent of US citizens. But these figures become
much less impressive when we realise that, considering
GDP at the world level, 50 per cent of this wealth
accrues to only the richest 8 per cent. According to Mila-
novic’s numbers, 80 per cent of global inequality is the
result of location, i.e. the outcome of a lottery that allo-
cates people to one of the countries of the world before
birth. The consequences are stark: a US citizen belonging
to the poorest 5 per cent of the US population may be
happy to know that his or her income is higher than that
of 60 per cent of the world’s population.
Do these numbers offer ammunition to the idea that
social classes based on relative income are an old-fash-
ioned concept? Although I agree that the notion of class
struggle must be revised substantially, I doubt that Mila-
novic’sfindings have much to offer on these matters.
The importance of location in determining individuals’
relative income does not eliminate the actual phenome-
non of class struggle, and much less does it eliminate
social envy and the quest for political change. The reason
is that people are actually concerned with their relative
income at home: they are not much interested in how
they fare with respect to people in distant countries.
Many studies suggest that there is a growing opposition
in rich countries to globalisation because both the
unskilled workers and the middle class are losing ground.
On the other hand, both very high-skilled and very low-
skilled/nonmanufacturing workers seem to benefit from
globalisation. The latter are employed in the service sec-
Global Policy (2013) 4:2 doi: 10.1111/1758-5899.12033 ©2013 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 4 . Issue 2 . May 2013 211
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