Middle Classes Branko Milanovic Senior Scholar, Luxembourg Income - PowerPoint PPT Presentation

LSE public lecture Globalisation, Migration and the Future of the Middle Classes Branko Milanovic Senior Scholar, Luxembourg Income Study Center, Visiting Presidential Professor, City University of New York Professor Robert Wade Chair, LSE Hashtag for Twitter users: #LSEMilanovic

Recent trends in global income inequality and their political implications Branko Milanovic LIS Center; Graduate School City University of New York Spring 2016 Branko Milanovic

A. Within-national inequalities Branko Milanovic

Ginis in the late 1980s and around now ~1988 ~2011 Change Average Gini 35.9 38.4 +2.5 Pop-weighted 33.7 36.5 +2.8 Gini GDP-weighted 32.2 36.4 +4.2 Gini Countries with 30.6 36.0 +5.4 Gini increases (41) Countries with 45.0 41.4 -3.6 Gini decreases (22) Branko Milanovic From final-complete3.dta and key_variables_calcul2.do (lines 2 and 3; rest from AlltheGinis)

Ginis in 1988 and 2011 (population-weighted countries) 60 BRA 50 MEX NGA CHN-R USA 40 CHN-U 30 IND-R 20 20 30 40 50 60 Gini in 1988 twoway (scatter gini gini_88 if bin_year==2011 & keep==1 & mysample==1 & group==1 [w=totpop], text(50 55 "MEX") text(57 60 "BRA") text(42 34 "USA") text(23 30 "IND-R") text(46 36 "NGA") text(39 24 "CHN-U") text(45 30 "CHN-R") ylabel(20(10)60)) (function y=x, range(20 60) Branko Milanovic legend(off) ytitle(Gini in 2011) xtitle(Gini in 1988)) Using final11\combine88_11.dta

Market, gross and disposable income Ginis in the US and Germany USA Germany .5 .5 .45 .45 .4 .4 .35 .35 .3 .3 .25 .25 1970 1980 1990 2000 2010 1970 1980 1990 2000 2010 year year Define_variables.do using data_voter_checked.dta Branko Milanovic

Market income inequalty and redistribution 10 .2 7 4 0 Dashed line: 1 Gini pt redustribution for 1 Gini pt increase in market Gini 94 .15 Germany 84 89 78 83 .1 13 10 4 73 0 7 USA 97 94 79 86 91 74 .05 Mexico 10 12 96 8 94 84 92 89 0 .4 .45 .5 .55 .6 Gini of market income Branko Milanovic From voter/..define_variables

Issues raised by growing national inequalities • Social separatism of the rich • Hollowing out of the middle classes • Inequality as one of the causes of the global financial crisis • Perception of inequality outstrips real increase because of globalization, role of social media and political (crony) capitalism (example of Egypt) • Hidden assets of the rich Branko Milanovic

How to think of within-national inequalities: Introducing the Kuznets waves Branko Milanovic

The second chapter of my forthcoming book (April 2016) 10

Kuznets cycles defined • Kuznets cycles in industrial societies are visible when plotted against income per capita. Inequality driven by technological developments (two technological revolutions), globalization and policies. Also wars. • They reflect predominantly economic forces of technological innovation and structural transformation. But also wars and policy changes. • Cyclical movement of inequality: long Kuznets cycles. • Kuznets saw just one curve. We now know there may be many more. 11

Malign and benign forces reducing inequality (downward portion of the Kuznets wave) Malign Benign Societies with stagnant Idiosyncratic events: wars Cultural and ideological (e.g. mean income (though destruction), Christianity?) epidemics, civil conflict Societies with a rising Wars (through destruction •Widespread education mean income and higher taxation: War (reflecting changing returns) and Welfare ), civil conflict •Social pressure through politics (socialism, trade unions) •Aging (demand for social protection) •Low -skill biased TC •Cultural and ideological (pay norms?) 12

Kuznets and Piketty “frames” and the Kuznets waves Ginis for England/UK and the United States in a very long run 70 60 50 USA 40 30 England/UK 20 10 0 1600 1650 1700 1750 1800 1850 1900 1950 2000 2050 From uk_and_usa.xls

Kuznets relationship for the UK, 1688-2010 60 1867 1913 50 168 Gini of disposable per capita income 40 2010 1993 30 196 1978 20 10 0 1000 10000 100000 GDP per capita (in 1990 international dollars; Maddison)

Kuznets relationship for the United States, 1774-2013 60 1860 1933 50 1929 2013 1774 Gini of disposable per capita income 40 194 1979 30 20 10 0 1000 10000 100000 GDP per capita (in 1990 international dollars; Maddison)

What might drive the 2 nd Kuznets cycle down? • Progressive political change (endogenous: political demand) • Dissipation of innovation rents • Low-skilled biased technological progress (endogenous) • Reduced gap in education (but it is not a silver bullet) • Global income convergence: Chinese wages catch up with American wages: the hollowing-out process stops • Note that all are all endogenous 16

The Kuznets relationship for Brazil, 1839-2013 70 1991 1972 60 50 2013 40 1930 Gini 30 20 1885 10 0 0 1000 2000 3000 4000 5000 6000 7000 8000 GDP per capita (in 1990 international dollars) Branko Milanovic

Downswing of Kuznets first cycle and upswing of the second Kuznets cycle in advanced economies Level of Level of Approximate Reduction in GDP The second maximum minimum number of inequality increased Kuznets wave inequality inequality years of (Gini points) (how many (increase in (peak of (trough of downswing of times) during Gini points) Wave 1) Wave 1) the Kuznets the Gini points (year) wave downswing (year) 51 (1933) 35 (1979) 50 16 4 United States Strong (+8) 57 (1867) 27 (1978) 110 30 >4 UK Strong (+11) 53 (1918) 31 (1985) 70 22 <5 Spain Modest (+3) 51 (1851) 30 (1983) 120 21 <9 Italy Strong (+5) 55 (1937) 31 (1981) 45 24 6 Japan Modest (+1) 61 (1732) 21 (1982) 250 35 7 Netherlands Modest(+2) 18 Table2_data.xls

Urban Gini in China: 1981-2014 (based on official household surveys) 0.35 0.3 0.25 Urban Gini 0.2 0.15 0.1 0.05 0 Year Branko Milanovic

Where are now China and the US? First Kuznets wave Second Kuznets wave Gini China 2013 United States 2013 GDP per capita

B. Between national inequalities Branko Milanovic

The third chapter of my forthcoming book (April 2016) 22

Different countries and income classes in global income distribution in 2008 90 100 percentile of world income distribution USA 70 80 Brazil 50 60 20 30 40 Russia China India 10 Branko Milanovic 1 1 20 40 60 80 100 country percentile From calcu08.dta

100 10 20 30 40 50 60 70 80 90 1 1 Denmark 5 country ventile 10 Mozambique 15 Tanzania Mali Uganda 20

Annual per capita after-tax income in international dollars US 2nd decile 5000 Chinese 8th urban decile 500 1988 1993 1998 2003 2008 2011 From summary_data.xls

Large gaps in mean country incomes raise two important issues • Political philosophy: is the “citizenship rent” morally acceptable? Does global equality of opportunity matter? • Global and national politics: Migration and national welfare state • (will address both at the end) Branko Milanovic

C. Global inequality Branko Milanovic

Global and inter-national inequality 1952-2014 .75 Concept 3 .65 Concept 2 .55 Concept 2 without China Concept 1 47 .45 1950 1960 1970 1980 1990 2000 2010 year Branko Milanovic Defines.do using gdppppreg5.dta

Global Gini 1820-2011 75 L-M and M series 70 65 B-M series 60 55 50 45 40 35 30 1800 1850 1900 1950 2000 2050 Branko Milanovic

Shares of global income received by top 10% and bottom 60% of world population 70 Top 10% (L-M data) 60 Top 10% (B-M data) 50 Percentage share of global income 40 30 20 Bottom 60% (B-M data) 10 Bottom 60% (L-M data) 0 1800 1850 1900 1950 2000 2050 Year Branko Milanovic

La longue durée: From Karl Marx to Frantz Fanon and back to Marx? Location 80 Forecast 60 Gini index Location Location 40 Location 20 Class Class Class 0 1850 2011 2050 Branko Milanovic

Essentially, global inequality is determined by three forces • What happens to within-country income distributions? • Is there a catching up of poor countries? • Are mean incomes of populous & large countries (China, India) growing faster or slower that the rich world? Branko Milanovic

C1. Technical issues in the measurement of global inequality Branko Milanovic

Three important technical issues in the measurement of global inequality • The ever-changing PPPs in particular for populous countries like China and India • The increasing discrepancy between GDP per capita and HS means, or more importantly consumption per capita and HS means • Inadequate coverage of top 1% (related also to the previous point) Branko Milanovic

The issue of PPPs Branko Milanovic