Book review: Global Inequality (Branko Milanovic)

Inequality has become a major topic of conversation in recent years, both in the media and in casual conversation. When most people think about inequality, they are thinking about inequality within their country - the difference between the lives of the rich, and the lives of the poor, but within the same country context. However, if we broaden the scope beyond simply considering a single country, and consider global inequality, it quickly becomes clear that the within-country inequality is dwarfed by the inequality between countries. To see this, consider the difference in living standards between a poor family in a rich country like New Zealand, and a poor family in a poor country like Chad or Congo. Those families really are worlds apart.

Both components (within-country and between-countries) are covered in Branko Milanovic's 2016 book Global Inequality, which I just finished reading. Milanovic is one of the world's greatest authorities on global inequality, having written many seminal research articles on the topic (many of which I have discussed on this blog, including here and here and here and here). The book has essentially four parts. In the first part, Milanovic looks at how global inequality has changed over the last 25 years. This sets the scene for what follows, because the last 25 years has seen a decline in global inequality, driven in large part by the rapid growth of China. This idea is well established in Milanovic's research, which I have discussed earlier. Chinese growth, which is lowering global inequality, sits aside rising inequality within China, as well as within the US and other developed countries. The juxtaposition of these trends sets up the potential for an interesting exploration of global inequality overall.

The second part of the book looks at the deficiencies of the Kuznets Curve. The classical Kuznets Curve suggests that from low levels of income per capita, inequality initially rises, but then at higher levels of income per capita, inequality begins to fall. However, this explanation is unable to explain the recent rise in inequality in western developed countries. Milanovic offers an alternative explanation, which he terms Kuznets Waves. He suggests that western countries have been through a first wave (increasing inequality up to the World Wars, and then decreasing inequality from then until the 1970s), and have begun a second wave (with inequality increasing in recent years). In contrast, developing countries remain in their first wave.

The third part looks at the evolution of inequality over a much longer timeframe of the past two centuries. For those like me who are familiar with Milanovic's other work, this section has little new to offer. However, the fourth part of the book looks to the future, using the concept of Kuznets Waves, as well as increasing income convergence between countries, to consider general trends in future global inequality. This last section was the highlight of the book for me, even though the fraught nature of prediction will render the specific details already out of date in some places. In particular, Milanovic's views on inequality within the US are interesting, and include that:

• Higher elasticity of substitution between capital and labor, in the face of increased capital intensity of production, will keep the share of national income that accrues to capital owners high.
• Capital incomes will remain highly concentrated, thus leading to high interpersonal inequality of incomes.
• High labor and capital income earners may increasingly be the same people, thus further exacerbating overall income inequality.
• Highly skilled individuals who are both labor- and capital-rich will tend to marry each other.
• Concentration of income will reinforce the political power of the rich and make pro-poor policy changes in taxation, funding for public education, and infrastructure spending even less likely than before.

Some of these trends and predictions are already unfolding, and were underway at the time of Milanovic writing the book, so this is not extensive futurism. Nevertheless, the underlying explanations for these trends is helpful to understanding Milanovic's highlighting of them as particularly important for future global inequality. Along the way, Milanovic refers to a 'new capitalism', where:

...rich capitalists and rich workers are the same people. The social acceptability of the arrangement is enhanced by the fact that rich people work. It is moreover difficult or impossible for the outsider to tell what part of their income comes from ownership and what part from labor. While in the past, rentiers were commonly ridiculed and disliked for doing work that involved nothing more demanding than coupon-clipping, under the new capitalism, criticism of the top 1 percent is blunted by the fact that many of them are highly educated, hardworking, and successful in their careers. Inequality thus appears in a meritocratic garb...

The book isn't all good, however. Regular readers of this blog will know that I truly dislike people who compare stocks with flows (see here, for example), and Milanovic at one point does compare wealth (a stock) to GDP (a flow). However, that is a minor gripe in a book that is filled with excellent explanations that avoid unnecessary technicality. Some readers will be looking for a prescription of how to tackle inequality in the future. On that point, Milanovic is surprisingly unclear. He does seem to strongly favour a move towards the equalisation of endowments (which many economists now refer to as pre-distribution), rather than using the tax-and-transfer system that most governments currently rely on (re-distribution). However, Milanovic carefully leaves specifics on how such equalisation could be achieved alone in this book.

If you are looking for an overall primer on global inequality, then I recommend this book as a good place to start. It's not a page-turner, but Milanovic has done a good job of making this topic come alive. Inequality is an important topic for us to understand, and we need to broaden our understanding of it beyond considering the inequality only our own country.