[SCMP Column] Real Inequality

May 14, 2016

The “ Global Top 1%” – the lucky 70 million people who have captured a massive share of the new wealth generated in the world economy over the past 30 years – must be squirming over their Bollinger about the public enemy status they are beginning to acquire worldwide. All the more so with the publication of a hard-hitting new book by the Serbian-American economist Branko Milanovic.

Global Inequality” reveals that the main losers of the past three decades of globalization have been western middle classes. No wonder then that politics is turning so populist and pear shaped in so many countries. In fact, Milanovic quite persuasively puts inequality worldwide at the heart of a wide range of ills, threatening our economies, and threatening our long-cherished democracies too.

Alongside these main losers, the main gainers of globalization have not just been the “Top 1%”, and the 1,500 billionnaires worldwide at their heart. They have also been Asia’s emergent middle class – led by China of course. And this has led to a strange outcome: while inequality inside individual countries has widened, inequality between countries has narrowed – and strikingly.

This leads Milanovic to some tough conclusions: the shift in economic power away from the rich west to Asia has been strong, and will continue; the economies of the west face decades of stagnation ahead, with their middle classes hurting the most; we see the emergence of a “global plutocracy” built around the interests of the “Top 1%”, which will compromise our democracies, and possibly trigger populist and “localist” backlashes. We can see this already in the US with Donald Trump, in the UK with the right wing call for exit from the European Union, and this week in the election of Davao Mayor Duterte as the Philippines’ new president. Our Occupy movement and youthful unrest are likely part of the same phenomenon.

Milanovic sees China’s emergence since the late 1970s as an “epochal change”, and China “the great income equalizer”. In 1970 the US GDP per capita was 20 times that of China. It is now less than 4 times. But we now see a perverse reversal about to occur: for the past three decades, rising wealth and incomes in China have provided the main force behind narrowing the wealth gap between rich and poor nations. Average incomes for China’s “middle” have tripled in the two decades from 1988. But now average incomes in China are coming close to the world average. Once incomes pass the global average then their continued rise will actually make inequality worse, not reduce it. To keep global inequality from getting worse, we will need to see strongly rising incomes in other huge poor countries, like Indonesia and Brazil – and of course India. We might be a long time waiting.

Milanovic identifies different distinct forms of inequality: the first he calls “existential inequality”, and it arises from the sheer luck of where you are born. Simply by being born in the US rather than the Congo, your income will on average by 93 times higher. This means that 12% of America’s population live gilded lives among the “Top 1%”, along with 9% of Japanese or Swiss. By the way, to be in this Top 1%, your average after-tax income needs to be over $71,000 a year – which puts a very large number of you reading this article in the “Top 1%”. This compares with the global median income of $1,400,  so it is easy to see how existential wealth feeds itself: a 1% rise in income for someone earning $71,000 would be $710 – equal to a 50% jump for someone earning the median income.

He then identifies “legal inequality”, by which most legal systems entrench the privileges and advantages of social elites. Then there is income and wealth inequality, by which inherited wealth buys access to best education and to property wealth that protect and preserve privilege. Here, he identifies an interesting perversity – that more women in the workforce, earning higher incomes is actually aggravating inequality – because a self-selection process tends to mean that wealthy, well educated women partner with wealthy, well-educated men – making such couples even more elite. And there is “meritocratic inequality” – where political commitment to supposedly-equalising meritocratic arrangements actually aggravates inequality. He asks what is the merit of getting everyone to start at the same starting line, if one competitor has a Ferrari, and another a bicycle.

It is these inequalities inside individual countries that account for the widening rich-poor gap in so many rich western economies, and a hollowing out of the politically-moderating middle classes, putting democracy in danger. As the super-rich use wealth to secure political influence, so politicians respond mainly to the concerns of the rich, sowing the seeds of “dictatorships of the propertied class” disguised in the garb of democracy. He sees producers giving priority to luxury goods, and governments cutting welfare spending, instead giving priority to policing, and infrastructure-building.

Whether you agree with his politics or not the statistical support for Milanovic’s story is as compelling as that garnered by Pinketty last year. He is persuasive that political concern about rising inequality is more than a passing fad, and that we need to think about narrowing the gaps, inside countries in particular, if we are going to avoid very ugly social and political developments worldwide.

His solutions: first, ensure equal access to good education, and widespread property ownership – uncontroversial, except it is easy to see even here in Hong Kong how hard it is to achieve this. Second, more controversially, he calls for lower obstacles to migration, and to international labour movement, arguing that this would be massively significant in reducing inequality between countries. Again, governments around the world facing the present political pickle linked with global recession and massive migration into Europe from Syria and Iraq, are likely to run a mile from Milanovic’s recommendation. That of course does not make him wrong.
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