Inequality in the World Economy
by the Numbers
An interview with Branko
Multinational Monitor magazine,
July / August 2003
[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:
Multinational Monitor: Globally, is economic
inequality rising, staying the same or diminishing?
Branko Milanovic: To answer requires distinguishing
between three different concepts.
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
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 wealth?
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
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
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
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
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 for growth.
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
in Africa? 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 10 years.
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 going together?
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 factors.
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
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 rich.
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
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
MM: Are there other elements of economic
globalization or processes of international trade or international
investment flows that contribute significantly to equality or
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
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
MM: What have you found in looking at
the period of deglobalization between the end of WWI and the start
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
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
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
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 indistinguishable,
domestic policies vary quite a lot, from those of say Margaret
Thatcher's UK to socialist-led Sweden or to corporatist Austria.
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 basicalIy 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
other. While today's rich countries .. 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 technology.
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 should be.
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 are faraway.
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 for it?
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
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.