with Branko Milanovic
Multinational Monitor: Globally, is economic inequality
rising, staying the same or diminishing?
To answer requires distinguishing between three
Concept one: If we treat every country as a unit,
the differences between mean incomes of the countries
are unambiguously rising over the last 20 years,
and even over the last 50 years. In other words,
countries are diverging.
Concept two: If, as before, we treat each country
as a unit but give a weight to each country equal
to its population, then inequality has been declining
over the last 20 years.
That concept two is a useful one, but it is not
really the one we want to study, because it is only
an approximation to concept number three: the inequality
of all individuals in the world. This measure of
inequality takes each individual as equally important,
gives to each the same weight, and adjusts for differences
in price levels between the countries. It is the
most difficult concept to calculate, not the least
because we didn't have, or had only very fragmentary,
data on national income distributions for many countries
until very recently. These national distributions
are necessary if we want to derive a world distribution
of income across individuals.
Now, regarding concept three, we can say that inequality
is extremely high. Everybody agrees on that. It
is more difficult to say whether it is rising. I
think that the preponderance of evidence is that
it is slightly increasing or that it displays no
clear trend over the last 20 years.
MM: When you are measuring inequality,
are you looking at income or wealth?
Milanovic: In each case, we are
looking at income, or more exactly income and/or
expenditures. In other words, we are always looking
at people's current welfare. We do not have measures
of assets or wealth simply because there are no
surveys of wealth in most of the world.
MM: Do you have any intuition of what
you would find if the data existed on assets and
Milanovic: It is very difficult
to say that, but within nations inequality of wealth
is always higher than inequality of income. Income
is the result of work and investment done over a
year and income differences are the product of people's
current jobs, investment luck, life cycle effects
and so forth. Inequalities of wealth, that is inequalities
in actual ownership of real and financial assets,
are much greater because they are essentially due
to several generations accumulating assets, or to
the accumulation of assets over one's entire life.
Thus annual differences in income are basically
cumulated to produce much larger wealth differences.
MM: To return to the three different approaches
to assessing global inequality, what makes for such
different results? What role does China play?
Milanovic: What makes for such
different results is that the units of observation
are different. In concepts one and two, we're basically
looking at each country as a unit and then assuming
that there is no inequality within a country. So
each Chinese has the mean income of China, each
American has the mean income of the United States.
We ignore inequalities within nations; that is,
we present a much simplified picture of actual inequality.
The difference in results between concepts one
and two for the most recent period is precisely
due to the role of China. China, and to a lesser
extent India, have grown very fast during the last
20 years. Since they started as very poor countries,
and indeed very populous countries, they have reduced
the distance between their own GDP per capita and
the world's average or median income. This, when
we use population weights, has contributed to reducing
inequality as expressed by concept two.
Most people stop at that point. They say that
since China was very poor, and since it is a large
country that has grown fast, it must have reduced
inequality. So far so good. But then we have to
go one step further and ask, What has happened to
inequality within China? As a matter of fact, inequality
in both China and India has increased significantly.
When we add that component, and take also into
account increasing national inequality in countries
as diverse as the UK, the United States, Russia,
Indonesia, Nigeria, etc., then we find that overall
inequality between people in the world is constant
or slightly increasing.
MM: So both China and India are
large countries in the developing world that are
growing significantly although in different amounts,
but where internal inequality is rising?
Milanovic: That's true. Inequality is
rising in both of these countries.
When we think about world inequality, there are
basically two steps. Step one, are mean incomes
in China and India rising? We say yes and it is
good news both for reducing world poverty and world
inequality. In step two, we ask, is inequality within
China and India increasing? The answer is, yes,
it is going up. Inequalities between different provinces
or states are rising, and inequalities between urban
and rural areas have increased, and of course inequality
between individuals has gone up. Because these are
inequalities between large numbers of people, they
contribute significantly to world inequality.
So these two aspects always have to be kept in
mind: what is happening to the mean income of China
and India, and what is happening to the distribution
within these two nations. Of course, for the sake
of simplicity I am speaking of these two countries
alone because they, together with the United States
and Western Europe, are key in influencing the evolution
of world inequality. But formally speaking the same
analysis applies to every country.
MM: Is there any rule that suggests that
growing economies should be characterized by rising
levels of inequality?
Milanovic: There is a famous
argument by Simon Kuznets that says if you are very
poor and then start growing, then by necessity there
will be a structural change such that people would
move from low productivity areas like agriculture
that are characterized by low inequality to high
productivity and high inequality areas like manufacturing
or services. There is a view that development will
therefore be associated with increasing inequality.
There are also more recent views that hold the
reverse. This perspective holds that high inequality
is an obstacle to growth, because you may have an
entrenched elite which does not care about the country
and this fosters political instability; also because
people are not able to work in the areas where their
contribution, given their talents, would be greatest.
For instance, if you have lots of poor people who
cannot get a proper education, and despite their
inherent abilities, end up selling trinkets on the
streets, that is clearly not going to be very good
We have different theories, but none of the theories
works perfectly. While some theories might work
okay when we compare countries' inequalities at
a point in time, they may not work when we analyze
the evolution of a single country over time. In
the West, we have seen major declines in inequality
during the last century, and at the same time these
countries have grown tremendously.
In sum, there is really no clear cut relationship
between level of income and growth on the one hand,
and inequality on the other. The relationship seems
to depend on many other things like institutions,
spread of education, democracy, social history of
the country and the like.
MM: To look at regions, say Latin America,
what is the level of relative inequality there and
how do you see that impacting on overall growth
and economic dynamism?
Milanovic: Latin America has
always been characterized by very high inequality,
and with Africa, it is the most unequal continent
in the world. So it has contributed always significantly
to world inequality.
On top of that, we have had in Latin America a
so-called lost decade (the 1980s). The mean income
of many Latin American countries is today the same
as 20 years ago. Two decades ago, the Latin American
region, along with Eastern Europe, was the middle
class of the world. With incomes stagnant in Latin
America and sharply down in Eastern Europe, that
"world middle class" has collapsed. So
what has happened over the last 20 years in Latin
America has exacerbated global inequality.
MM: What is the profile of inequality
Milanovic: We know the least
about Africa, because data for Africa did not become
available until the mid-eighties. This is one of
the reasons why one cannot calculate with any level
of precision world inequality among individuals
before, say, 1985.
But we do know that Africa has traditionally been
characterized by very high levels of inequality,
similar to those in Latin America. To give you sort
of a feeling how large they are, inequality levels
are close to double of those in the United States.
There is no clear evidence whether inequality within
African countries has gone up or down over the last
Actually, at such high levels of inequality as
in Africa, it is difficult to have further increases.
You cannot have a situation where one person has
the entire income of the country. People would simply
die or rebel at zero income.
MM: In general, growth rates in Africa
have been negative over the last 20 years, but even
so, they've managed to maintain the levels of inequality.
Milanovic: Exactly. Inequality
within Africa has remained, it seems, unchanged.
And because the overall growth rate of the continent
has been negative, Africa has further declined behind
the rest of the world. So there was a significant
deterioration in the position of Africa as a whole,
and in particular of the poor people in Africa.
When you compare 1988 with 1998, the poor people
in Africa, already among the poorest in the world,
have lost a tremendous percentage of their incomes.
Combining that fact with increasing population,
Africa might in the not-too-distant future contain
the largest pool of poor people in the world.
MM: Recent experience in Eastern Europe
is particularly interesting because countries there
started with a population that had relatively high
levels of equality prior to the collapse of the
Soviet bloc and communism.
Milanovic: Eastern Europe has
had a similar evolution to that of Latin America
in the sense that it was, prior to 1980, the world's
middle class. It had a mean income maybe a third
less than the developed world. Then both these regions
-- Latin America and Eastern Europe including the
former Soviet Union -- declined in real terms. The
declines in most of Eastern Europe have been more
severe than in Latin America. Countries there have
had negative growth rates rather than being around
zero, as in Latin America.
On top of that, in almost all countries of Eastern
Europe, income inequality has shot up quite significantly.
However, the picture in Eastern Europe is a little
bit more diversified than in other regions. Central
European countries have now regained income levels
of 10 years ago and maybe have even advanced, and
there was not much of an increase of inequality
in countries like the Czech Republic or Slovenia.
On the other hand, we have had tremendous declines
of income in most of the former Soviet Union, for
example in Russia, Ukraine, Moldova and Armenia,
and also tremendous increases in inequality in these
countries. So for the poor and a lot of middle class
in these countries, the transition from Communism
has been a "double whammy."
MM: So the group of countries that have
managed to rebound and either stay where they were
or grow are relatively more equal versus the countries
that have had negative growth rates and higher levels
of inequality. What accounts for those two factors
Milanovic: There is clearly a
relationship such that the countries that have recovered
much faster and are in a much better shape today
have had much smaller increases in inequality following
the fall of Communism. You may not want to say that
the relationship is mono-causal, that is, that smaller
increases in inequality enabled these countries
to grow faster, but it is, I think, one of the contributing
For example, countries of Central Europe have
continued with large spending on social programs
for the unemployed, for children, for families,
pensioners and so forth. They have also been able
to preserve institutions and to observe the rules
much better than the countries with larger increases
It is almost impossible not to see that the way
privatization was conducted in Russia led both to
the collapse of institutions, and contributed to
increased inequality. Russian-type privatization
(and, of course, Russia is not the only such country)
meant that some people have been able to acquire
assets for practically free. They then had to manipulate
public institutions so that nothing they acquired
de facto illegally would be taken away from them.
So these three things went hand in hand: the type
of privatization, the collapse of institutions,
and the increase in inequality.
MM: There has been quite a considerable
debate in recent years about whether processes of
economic globalization are contributing to or diminishing
inequality. What is your perspective on that?
Milanovic: First, I would say
that it is very difficult to come to any strong
and sound judgment on that, because the data are
quite imperfect and we have a long way to go before
we get good and accurate data about distribution
of income across individuals in the world. But even
if we had perfect data, it would still be difficult
to establish the causal link because it is likely
that globalization or openness has very different
effects on inequality from country to country depending
on the countries' endowments, institutions, level
of income, position in the world economic system
and so forth.
My view, based on my own work as well as that
of a number of people, including Robert Barro and
Martin Ravallion, is that in very poor countries
increased openness to foreign investment and trade
might exacerbate inequalities. Large segments of
people in those countries are totally unskilled,
at least in terms of the demands of the modern economy,
and cannot take advantage of international trade.
Only the relatively few medium- and high-skilled
people in those countries can get ahead.
There is some evidence that it is only at some
middling levels of income around the three C's --
Chile, Colombia and the Czech Republic -- where
one might find a reversal in the sense that the
poor benefit more from openness than the rich. Note
however that even when we say that they benefit
more, we mean that they benefit more in terms of
their initial (pre-trade) income. But since that
income may be, and often is, much lower than income
of middle and upper strata, absolute income gains
from openness would still be skewed towards the
In conclusion, I would think that the overall
picture is fairly nuanced and that it is difficult
to say that globalization simply increases inequality
or decreases it.
MM: Is it the case that trading among
countries that are closer in economic levels confers
broader benefits than trading among countries that
are economically disparate?
Milanovic: There may be some
evidence that trading between countries that are
on a fairly similar level of development leads to
a convergence in their incomes, so that the poorer
countries catch up with richer countries. The European
Union is the best example of that convergence. Ireland,
Spain, Portugal and Greece now are more similar
in incomes to, and in some cases have even higher
incomes than, the old developed countries, like
the United Kingdom or France.
But there are two elements here. One element is
that you might have benefits from trade even for
dissimilar countries (as the theory of comparative
advantage suggests). Opening oneself to trade might
be good for the mean income of both countries. Yet
even there the gains from trade may be unequal between
the two countries. The second question is how the
increase in mean income is distributed between people
in the country. There, under some conditions, as
I mentioned before, trade might exacerbate inequality.
MM: Are there other elements of economic
globalization or processes of international trade
or international investment flows that contribute
significantly to equality or inequality?
Milanovic: The thing that is
frequently overlooked is the significant increase
in world interest rates in the early 1980s, which
not only led to the debt crisis in Latin America
and later Eastern Europe, but also contributed to
increasing inequality within countries, and ultimately
to world inequality. Within a year, real interest
rates went up from practically zero to 5 percent
or 6 percent. We know that the distribution of assets
in each country is very skewed, and the rate of
interest is the return on the assets. So within
each country the rich gained from higher interest
rates. On the world level too, rich countries which
are by definition capital-rich gained from it. It
is of course the rich people in rich countries who
gained the most.
Elements which level inequality have to do mostly
with domestic policies -- investment in education,
in health and infrastructure, and social transfers
as well as progressive taxation. It is more difficult
to think of international factors that have the
same effect, although trade and openness might be
equalizing in countries with some reasonably high
level of income, higher than the turning point of
our three-C countries.
MM: Is it fair to say that the global
financial system has evolved so that it makes sense
to talk about global interest rates and that that
was less so in a previous period?
Milanovic: We have clearly moved
toward a more integrated international capital market,
as compared to, say, the 1960s. And it is not only
shown by the financial flows, which of course have
increased tremendously, but is also shown empirically
by the correlation between real interest rates between
countries. Interest rates in one country are today
much more related to interest rates in other countries
than was the case 20 or 30 years ago when financial
and capital markers were much more segmented and
MM: What have you found in looking at
the period of de-globalization between the end of
WWI and the start of WWII?
Milanovic: That period has received
almost no attention from economists. It is very
much a political period, so political scientists
have studied it a lot, and economists much less
with, of course, the notable exception of the Great
Depression. But although the Depression was the
signal event of the period, it is not the only thing
which happened between 1918 and 1939.
I was motivated to study this period for the following
reason. The mainstream position, in a simplified
way, is to say that integration is good because
it leads to convergence in incomes.
But if you look at the first period of globalization,
from 1870-1913, at the world level you find a huge
divergence of incomes. The poor countries at that
time did not catch up at all, they actually fell
behind in absolute terms while the already richer
countries -- the United Kingdom, France, the rest
of Western Europe, the United States -- became richer.
Now most economists either ignore this fact or say
that this is because poor countries did not really
integrate. So presumably the theory is still correct
but applies only to the countries that do integrate
and/or are at a similar level of income.
Well, when you look at such countries, Western
Europe and North America, in the period between
the two wars, which was clearly a period of de-globalization,
you would expect that their incomes should diverge.
If the set of rich countries converges during the
period of globalization, then they should diverge
during the period of de-globalization. But you don't
find that. You find continued convergence of incomes.
If integration equals convergence among the club
of the rich, why is it then that the disintegration
between the two wars is associated with convergence
of incomes as well?
This leads me to believe that transfer of knowledge
and information, among countries at a similar level
of income, is very important in furthering convergence.
In other words, it is not trade alone.
MM: Does all this matter? Why should anyone
care about levels of inequality?
Milanovic: I think we should
care about levels of inequality because as processes
of globalization become stronger there is a much
greater awareness of differences in income between
different people and nations, and this influences
people's attitudes and behavior.
This process is very similar to what happened
in nation states in the eighteenth and nineteenth
centuries. Nobody cared about inequality when people
lived in small hamlets which were totally isolated
from each other.
Once you start communicating, though, you realize
that some other people are richer, often much richer
than you. They may not work harder than you or be
smarter than you, but they may have an income which
is 10 times as high. That creates lots of anger
and negative feelings. Some people call it envy
and treat it as somehow unacceptable. But even if
this were the case, you cannot just rule envy out
and forbid it to influence people's behavior. But
treating it as envy is fundamentally wrong. One
man's envy is another man's justice: a rich man
considers each comparison of incomes to be a product
of envy; a poor man might on the contrary see the
same difference in incomes as unjust.
Large income inequality between countries also
leads to migration, because people from poor countries
realize they can migrate to rich countries and increase
their income significantly. Tensions arise because
rich countries don't want to have too many people
overwhelm their social safety systems and in some
cases might also have problems culturally and socially
integrating the migrants.
Finally, there is the purely ethical consideration,
which says we should care about each individual
in the world approximately the same, that we should
not be totally indifferent to the fate of people
who are very poor.
MM: You mentioned investment in education,
health care and infrastructure as primary tools
to remedy inequality. Are there other key elements,
including for international policy?
Milanovic: My feeling, and it
is not based on empirical work, is that most of
the tools to remedy inequality are domestic in origin.
We see that from the differences in inequality levels
within the countries of the European Union, from
an egalitarian Nordic group to much more unequal
France or Great Britain. While international economic
policies are practically undistinguishable, domestic
policies vary quite a lot, from those of say Margaret
Thatcher's UK to socialist-led Sweden or to corporatist
There is however an important role for international
organizations, because the argument can reasonably
be made that the current system as embodied in the
World Trade Organization and international institutions
is basically skewed against poorer countries. For
instance, protection of intellectual property rights
has now become much stronger and makes the transfer
of technology to poorer countries much more expensive
than was the case 20 or 30 years ago, or at the
time when today's rich countries were poorer and
often copied technology freely from each other.
While today's rich countries were able to imitate,
and learn from each other when they were developing
in the nineteenth century, today's poor countries
are inhibited from doing so because they need to
pay huge sums to get patent rights and access new
Of course another example which everyone quotes
these days is agricultural and textile subsidies
in the rich world, which negates the comparative
advantage of poor countries.
So there is a scope also for policies which would
help inequality and poverty at the world level.
MM: What would you prescribe as an appropriate
role for income transfer policies -- whether domestically,
regionally or internationally -- to remedy inequality?
Milanovic: This is a very difficult
question. People have generally agreed that the
state does have a significant redistributive role
at the national level, though there are ongoing
debates about how generous that welfare function
It is much more difficult to argue that there
should be the same policy at the world level. People
in country x, which is rich, are certainly much
less interested in the fate of people in country
y, which is very poor, than they are in what happens
in their own country. This is quite understandable
both because people feel more concerned about those
who are closer to them and because their own welfare,
in terms of say political stability, may be more
strongly influenced by what happens to the poor
who live nearby than what happens to people who
But I think that we have nevertheless made some
progress in the area of world redistribution. If
you look 30 or 40 years ago, there was no official
development assistance. It didn't exist at all.
Now for the first time rich world countries are
willing to transfer money to the poorer countries.
There is of course the issue whether the money
is sufficient. I think that most people would agree
that it is not. It falls far short of rather modest
and formally accepted UN targets. A second problem
is whether the money is well used, and there is
general consensus that it is not.
So greater accountability or transparency in the
use of this money is important. The big question
is how that greater transparency can be insured.
I think that this is the next big issue in international
aid with which we shall have to deal. Only when
we can show that money is reasonably well used will
there be greater willingness from the people in
the rich countries to transfer some more money.
MM: You have also floated the idea that
aid money perhaps should be conditioned on or related
to levels of inequality in recipient countries.
Milanovic: This is based on a
simple idea: if you have a very unequal distribution
in a poor country, then there is a certain percentage
of people who are better off than, let's say, poor
people in the United States. Then the question could
legitimately be raised in the rich country, Why
should we transfer money to a poor country if that
money might end up in the pockets of somebody who
is richer than the taxpayer who originally paid
It is desirable to give assurance to the taxpayer
in the rich world, first that the money is not going
to be badly used, and secondly that it will be a
"progressive transfer," that is that it
will be a transfer which will help someone who is
poorer than he or she. If you have countries with
very high levels of inequality of income, as in
Latin America, then you really can doubt that this
kind of progressive transfer will occur.
MM: How would you operationalize the idea
of tying aid to inequality levels?
Milanovic: It would be reasonably
easy to operationalize. We could, say in World Bank
lending, adjust levels of aid to countries taking
into account their domestic levels of inequality,
penalizing highly unequal countries and helping
those that are very equal. For example, the GDP
per capita level -- which is used as the eligibility
criterion for soft loans -- could be adjusted by
the ratio between mean and median income in the
country. If income distribution is very unequal,
the mean-to-median ratio will be high. Thus, the
inequality-corrected GDP per capita will be raised
in high inequality countries and they could lose
eligibility for interest-free loans.
Consider Bangladesh and Nigeria. These two countries
have approximately the same level of income, but
inequality is much greater in the latter. The mean-to-median
ratio is 1.7 in Nigeria and 1.2 in Bangladesh. The
introduction of inequality-adjusted income will
therefore penalize Nigeria and could possibly disqualify
it from receiving soft loans as long as inequality
remains so high. This is similar to what is already
being done through attempts to aid more countries
with good governance and lower corruption. As already
mentioned, this proposal is based on the simple
idea that transfers at the international level should
follow the same rules as transfers at the national
level: they should flow from a richer to a poorer
person, and hence be inequality reducing.
Overall, I think there is a movement toward some
redistributive scheme at the world level. People
like John Rawls basically saw a very limited role
for international redistribution, but I think that
that view is becoming superseded by a growing awareness
of global inequality and poverty. This in turn will
lead to greater willingness to help in the rich
world provided one can reasonably insure that transfers
are helping the poor. However, redistribution at
the world level cannot be a substitute for normal
economics. Greater opportunity to benefit from international
trade and technology is key for poor countries'
development. This will not happen until the current
rules of the game, often determined by the rich
world alone, are changed.
Branko Milanovic is lead economist in the
World Bank research group and visiting professor
at the School for Advanced International Studies
at Johns Hopkins University. He has conducted cutting-edge
research on the scale of inequality in the world
economy. His work can be accessed on the web at: