Précis of ‘The Haves and the Have Nots’
By Branko Milanovic
Précis by Pete Laburn
Milanovic’s book provides a fantastic overview of global inequality, its evolution since the Industrial revolution and case studies of its nature in certain regions. Although the book was written in 2011, many events have taken place subsequent to this, namely the slowdown in India and China’s economic growth rates, the investment boom in Africa and the potential for a 2nd Cold War between Russia and Europe over Eastern European regions. One has to question what the impact of this will be in the long-term politically, economically and socially, and whether we are we looking toward a future where the global inequality gap will continue to increase. Whilst things have changed rapidly, I do still think this book has value in highlighting the gap between the ‘haves’ and ‘have nots’.
When we speak of unequal nations in the world, we speak of inequality between their average incomes or GDP per person. Although such inequalities have always been present, the differences between nations were rather small compared to what they are today. The large differences in mean income levels between countries are the product of the Industrial Revolution, which pushed some countries forward onto the path to higher incomes while others stayed behind. The most striking thing about inequality is that in the past it was composed predominantly of class differences. Today it has changed to being almost entirely by location. Today it is much more important whether you are fortunate enough to be born in a wealthy country than whether the income class to which you belong is high medium or low.
- Today the wealthiest 10% of income recipients receive 56% of the global income,
- The poorest 10% receive only 0,7% of the global income,
- The ratio between the top 10% and the bottom 10% is 80:1.
- The top 5% earn 37% of global income and the bottom 5% earning 0,2% of global income,
- The top 1% of global income, the 60-million wealthiest people in the world, come from West Europe, North America and Oceania.
- The bottom 1% is made up of 70% Asians, 25% Africans and 5% Latin Americans.
Instinctively, none of this feels right. The fact that the income of the top 1,75% of the world’s population matches the income of the poorest 77% does not seem either good or optimal, but rather a large cause for concern. The large income gaps between countries are driving socially unsustainable international migration flows. Locally, high inequality among communities and individuals is associated with political instability. These national political instabilities tend to spill over to neighbouring countries and even to the rest of the world.
The effects of Globalisation
According to the neoclassical economic theory, globalisation, even with only the movement of capital, goods and technology and not the free movement of people, should be accompanied by convergence in countries’ incomes as poor countries are supposed to grow faster than the wealthy. But in reality, this is not what happened. On the contrary, global incomes have diverged during the current globalisation, and capital has continued to flow mostly between wealthy countries.
Due to the costs of attaining technology, poor countries have not had access to technology. Thus on both accounts of capital flows and access to technology, globalisation appears to have been less favorable to the poor countries than economists originally thought.
What determines your income?
Looking at the actual incomes received by people in each country gives us the true picture of the world’s inequality. This shows that there are people who live in poorer countries who are wealthier than some people who live in wealthier countries. But what is most alarming is that in many cases practically all people living in a wealthier country are better off than all people living in a poorer country. There are many countries in the world whose top income classes are poorer than the poorest income classes in wealthy countries – this shows that where you live directly influences your income level, and most of one’s lifetime income will be determined at birth.
Citizenship is fate in the sense that it guarantees a person either a high or a low income. Statistics show that place of birth explains more than 60% of variability in global incomes. In addition, each 10% increase in average income of ones country of birth raises a person’s income by the same 10%. The other major factor affecting a person’s income in the world is the income class of his parents. These two factors explain more than 80% of a person’s income. The remaining 20% is due to other factors such as effort and hard work. These stats show that the portion of income that can be changed through hard work and effort is very small. Yes, a person can try to improve their position in a given country, but these efforts may often have a miniscule effect on one’s global income position.
Or, as a last possibility – a person may try to move from a poorer country to a wealthier one. Even if he does not end up at the high end of the new country’s income distribution, he might still gain substantially. Thus one’s own efforts, one’s country doing well, and migration are three ways in which people can improve their global income positioning.
Migration in an attempt to improve your income level
In an unequal world where income differences between countries are large and information about these income differences is widespread, migration is not a fluke, accident, anomaly or curiosity. It is simply a rational response to the large differences in the standard of living. The amount of migration flows is tiny compared to what it would be in a world of free migration of labour. Currently the flow of people from poor countries to wealthy countries is about one-twentieth of 1% of the poor world’s population annually. It is strongest where there are large differences in the average standard of living and geographical proximity. People from poor countries can, by migrating to wealthier countries, improve their standard of living approximately threefold. Thus it is not cultural but rather purely economic factors that are behind migrations.
But migration is a two-way affair. It is not only that poor people want to move to wealthy countries, but that there are enough jobs that wait there for them. The movement of labour is possible because there is a pull element too, although this tends to occur in the informal or undocumented sector. But often the inflow of immigrants creates a backlash as it is perceived to crowd out jobs for the local people, reduce their wages and introduce different cultural norms into the society. As a result, wealthy countries have begun a process of walling themselves in, to prevent foreigners from entering their country.
Causes of inequality in the past 30 years
Global income distribution in the past 30 years has been determined by 3 factors:
- Rising income differences within countries.
- The divergence in country mean incomes as poor countries grew more slowly than the rich.
- The fast growth of China and India
India and China are the two most populous countries in the world and both have registered phenomenal growth rates. These two countries started out very poor and have made large inroads in increasing their income levels, and created two strong engines of downward pressure on population-weighted inter-country inequality.
Since the mid-1980’s the last force has roughly balanced the first two and prevented global inequality from worsening further. However, should China or India’s growth rates slow, there is little doubt that global inequality would rise again.
Income inequality and the global financial crisis
The financial crisis which struck in 2008 is generally blamed on feckless bankers, financial deregulation, crony capitalism and the like. Although all of these elements contributed, these explanations overlook the fundamental reasons for the crisis which lie in the income distribution across individuals and social classes.
Rising income inequality in all countries in the world, and in the US in particular over the past thirty years, has made the wealthy even wealthier and the middle class feel poorer. In the US the top 1% of the population doubled its national income share between 1970 and the early 2000s. This resulted in a huge pool of available financial capital in search of profitable opportunities in which to invest. Overwhelmed with such an amount of funds, short of good opportunities to invest the capital, and enticed by large fees attending each transaction, the financial sector became more and more reckless, basically throwing money at anyone who would take it.
The second part of the equation explains who borrowed the money, and this again has to do with rising inequality. The increased wealth at the top was combined with an absence of real economic growth in the middle. The real median wage in the US stagnated for 25 years despite GDP growth. One way to make the middle class feel like it was earning more was to increase its purchasing power through broader and more accessible credit.
The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed. The real cause lies in huge inequalities in income distribution that generated much larger investable funds than could be profitably employed. The political problem of insufficient economic growth of the middle class was then solved by opening the floodgates of cheap credit. Could it have worked out differently? Yes, without 30 years of rising inequality and with the same overall national income, the income of the middle class would have been greater. More equitable and stable development would have spared the US and the world an unnecessary crisis.
The case of the Soviet Union
Much has been written to explain the sudden collapse of the communist-ruled ethnic federations of the Soviet Union, Yugoslavia and Czechoslovakia. Ethnic, historical, political, religious and other explanations have been offered for the collapse. But nothing has been said about the extremely different income levels in the USSR and Yugoslavia. At the time of the breakup, the Soviet Union held within its confines countries with income levels as vastly different as South Korea and the Ivory Coast. It is not possible for such an entity to remain united with such vast differences in income levels. In order to remain united, massive redistribution in favour of the poorest units would have to be undertaken, but such transfers would be resented by the richer provinces. This is precisely what happened in Russia – then still part of the Soviet Union. Russia did not want further subsidisation of the poorer states in the union and so the wealthy wanted out and the poor had no choice but to acquiesce.
A lesson from the collapse of the communist federations is that their inability to reduce huge, historically inherited income differences among its members was an important reason for their ultimate breakup. This problem will continue to plague many other countries. Will China, with its massively increasing regional differences of the booming coastal regions versus a poorer interior remain a united country? Can the European Union continue to absorb ever-poorer members without jeopardising its own unity and viability?
China beyond 2048
The single most serious threat to Chinese unity is increasing inequality. Chinese inequality almost doubled since the early 1980s, But, even more worrying is the composition of the Chinese inequality. China does not have the type of inequality where there are rich and poor people equally dispersed across the country. Rather, it has the type of inequality similar to that in the old Soviet Union and todays European Union where there are poor regions and rich regions. Here the poor and the rich are geographically concentrated together. The Chinese development since the early 1990s, when growth shifted to urban areas, has produced inequality of poor and wealthier provinces, which is much more politically destabilising.
Chinese growth is strongly concentrated in the 5 coastal provinces. They are the wealthier five of China’s 34 administrative regions (not counting the 3 cities of Shanghai, Beijing and Tianjin, whose GDPs per capita are the highest). These 5 wealthy, fast growing provinces represent about a quarter of the total Chinese population and are responsible for more than 40% of the Chinese GDP. At the other end of the spectrum, the three poorest provinces have all slipped in relative position since the 1990s to only a third of the China average GDP per capita. A faster than average growth among the wealthy provinces and a slower growth among the poor provinces has dramatically increased the top-to-bottom ratio of at least 10 to 1. This ratio is significantly greater than the same ratio that existed at the end of the Soviet Union. If there is ever a danger to Chinese national unity, it is very likely to come from the economic split within the nation.
Inequality in the US and the EU
By 2007, after the latest round of European Union enlargement, the overall inequality in the EU, composed of 27 countries, and in the US, composed of 50 states, was about the same. Therefore, the US is more unequal than individual European countries like France, Spain or Germany, and its inequality is the same as the EU as a whole. This means that the main cause of inequality in the EU is that its member countries are different – either wealthy or poor. In the US, the main cause of inequality is that regardless of state, there are wealthy and poor people across the country.
The EU framers were aware of the long-run unsustainability of a very economically unequal union and hence policies have for years been directed toward helping the growth rates of the poorer members. Free circulation of people, capital and goods contribute to enabling the new poorer member states to catch up within the next generation or two, in the same way that these policies contributed to equalising the mean incomes of US states between 1950 and now.
Inequality in Asia and Latin America
Latin America is a continent composed of internally very unequal countries that, however, do not differ among themselves much in their income levels. Conversely, Asia is a continent composed of internally relatively equal countries that differ among each other tremendously in terms of their average incomes. This is the contrast between the two continents making them mirror images of each other.
When we put these two continents together we see that 1). Huge differences in mean incomes in Asia and small differences in Latin America, as well as 2). Huge inequality in incomes within every country in Latin America and relatively equal distributions in Asia mean that inequality across all individuals in Asia and Latin America as a whole is very similar.
The differences between the two continents are due to where their inequality originates. Most of the Asia-wide inequality is caused by the differences in their levels of development, while in Latin America most of the differences are due to the inequalities within each nation. Therefore we can say that the cause of inequality in Latin America is class, while the cause of inequality in Asia is location.
The fact that Asia is so heterogeneous would make it very difficult for the continent to work closer politically. A closer political union, like the one in Europe, is rendered more difficult by the huge gaps in economic development that exist in Asia. For unions to be viable, there should be broad similarity in living conditions among member states. This cannot be achieved any time soon in Asia.
A global trilemma
The world faces a trilemma of how to continue with 1). Globalisation, while 2). The differences in mean incomes among countries are huge and increasing, and 3). The international mobility of labour remains very limited. These three things, which have so far characterised Globalisation 2.0, cannot be endlessly maintained. Globalisation naturally leads to better knowledge and awareness of living conditions across the globe, which, if income differences between countries are large, stimulate migration. But large scale migration is not politically acceptable for the wealthier countries and they create ever greater obstacles to it.
In the long-run the anti-migration battle cannot be won if globalisation continues. A much better alternative would be to help reduce differences in average income levels between countries. In that case, migratory pressures would subside and the world would become a more homogeneous place, not threatening the continuation of globalisation. Alternatively, if both large income gaps between countries persist and wealthy countries limit or prevent migration, globalisation may have to be scaled back. For the ever-closer integration of economies and peoples to proceed, either poor people’s incomes have to be raised in the countries where they currently live, or they will come, in ever-greater numbers to the wealthier world.
The world today and challenges of the 21st century
Between the end of the Second World War and the fall of the Berlin Wall, there were three worlds on the planet. There was the first world of wealthy capitalist economies, there was a second world of socialist economies with single-party states, and then there was the third world made up of the three southern continents which had previously been colonised. This tripartite classification also correlated with income levels of the member countries.
So in what rough categories can we divide the world in the first decade of the twenty-first century? There is still the first world, although it has now become much wider as some former members of the second and third worlds have joined its ranks. The second world is no more, but there is still Russia, which aims to play in the Eurasian space, among the countries that have not been integrated into the first world. Then there is the Arab countries that are divided among themselves based on the accidental factor of possession of oil. Perhaps it is only Latin America that has remained in some ways the third world. Africa of course has also remained the third world, or due to its almost unrelieved misery and decline may even be given the title of the fourth world.
China remains a world apart, with a much higher income today than before, but with equally opaque ambitions and the same inner ambivalence about its role in the international world, or whether it wants a role at all. The rise of China was achieved using a mixture of recipes never seen before and very different from the Washington consensus for economic conduct. There has been no attempt to package these policies, explain how they might work elsewhere and sell the Chinese model of development or economic ideology. If a country wants to have a worldwide influence, it must not only sell toys and video recorders, but also offer the world an ideology. China has so far proved incapable or unwilling to do so. Unless it is able to present a compact set of lessons to be taken away from its success, its ideological influence will remain limited.
Attempting any classification in Asia today is difficult primarily because of the heterogeneity of the continent. Asia is composed of both first world countries like Japan, South Korea, Taiwan and Singapore, and a lots of extremely poor countries that are either trying to develop or who, according to their income levels, should join Africa in the fourth world.
At the time of writing the book in 2011, Milanovic felt that the most important challenge in this century will be to have economic progress in Africa, for otherwise the continent will increasingly fall, in almost all respects, behind the rest of the world. Due to a lack of political will from other countries around the world, Africa will have to prosper or fail by its own devices. Many commentators have the view that Africa is set back by aid and too much concern of outsiders and would be better left alone. However, it must be noted that the successes of West Europe, East Asia and South Europe were grounded in the political willingness of other countries to help them develop. Reasoning by analogy, Africa too would have to be, at first, pulled along by others. However, it is difficult to see which countries would be willing to help the continent.
Milanovic summarised the key challenges of the 21st century as follows: How to bring Africa up, how to peacefully bring China in, and how to wean Latin America off of its self-obsession and bring it into the real world. This is a tall order, but a very necessary task for the betterment of the world.