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Inequality and the Rise of the Global 1%: Great New Paper by Branko Milanovic

Duncan Green's picture

Ricardo Fuentes on an important new paper. Tomorrow, Ricardo and I continue the conversation.

The rich in the West are getting richer. Many countries have experienced a sharp concentration of incomes over the last three decades. The top 1% of Americans have doubled their share of national income (from 8 to 17%) since Ronald Reagan was inaugurated 32 years ago – see graph, source here. The elite in other advanced economies, including, Australia, the UK, Japan and Sweden, have also gotten a larger share of the pie. We have been able to understand the concentration of incomes at the national level thanks to the study of tax records by enterprising scholars such as Emmanuel Saez, Thomas Picketty and Sir Anthony Atkinson. But until recently, we didn’t know much about the global concentration of incomes (there’s no global tax collector with a similar database).

 

 

 

 

 

 

 

 

 

 

Enter Branko Milanovic, a lead economist from the World Bank. A quick detour before going to the global concentration of incomes. Milanovic has been working on inequality for decades – even when the topic was unfashionable. He describes the difficulty in talking about inequality here where he recalls:

“In many social parties or professional meetings in Washington and elsewhere, when introduced to and informed that I worked on inequality, my (more polite) interlocutors would make a [...] similar [point] (“why should inequality matter at all”); others, perhaps less polite, would wave their hands basically ascribing the fact that anyone would pay a person to study inequality to profligate ways of international bureaucracy.”

But inequality is rightly back in the center of academic and policy agenda and in a new paper Milanovic uses a large database of household survey to identify the winners and losers of the global economy between 1988 and 2008. He finds that:

“…it is indeed among the very top of the global income distribution and among the “emerging global middle class”, which includes more than a third of world population, that we find most significant increases in per capita income. The top 1% has seen its real income rise by more than 60% over those two decades. The largest increases however were registered around the median….These two groups—the global top 1% and the middle classes of the emerging market economies— are indeed the main winners of globalization….The surprise is that those at the bottom third of the global income distribution have also made significant gains….The only exception is the poorest 5% of the population whose real incomes have remained the same.” (page 12)

Milanovic explains with a single graph (below) – where he plots the increase in income of each global percentile – the reduction in global poverty where the most deprived are left behind, the stagnation of lifestyles for the middle class in many industrialized countries and the rise of the global plutocrats.

 

 

 

 

 

 

 

 

 

 

 

I want to focus in this post on the last element – the increase in income of the global elite and its implications. First, who are the global 1%? Around 60 million people scattered around the world but mostly concentrated in Europe and the US. In his book The Haves and the Have-Nots, Milanovic calculated that people with an average income of US$34,000 a year would make it into this group. It doesn’t seem like much, but remember it is income per person. Take an average family of four and then we are talking about US$136,000 – well above the average household income in OECD countries.

So, the global 1% has benefited from economic development and globalization since 1988 – their income has risen by about 60% in those two decades. But why does it matter if the global elite become richer? I’ve written elsewhere about why inequality matters, but most of the policies to reduce income inequality operate at the national level: redistributive taxation and equalization of opportunity lie in the realm of national governments. And as Milanovic explains “In a single country, people share the same government; if they feel that inequality is too high or society too unjust, they have a political mechanism – elections in a democracy; revolt in an autocracy- to make their concerns known. And the rulers, whether democratic or not, must, for reasons of self-preservation, take into account, in their thinking and decision making, the views of the population” (The Haves and the Have-nots, page 160). These mechanisms are not perfect (elite-capture and rent-seeking are common around the world) but at least they exist.

In contrast, we do not have them at the global level, and this absence of checks and balances is well exploited. The only truly globalised group are probably among these 60 million people – their physical and financial mobility way higher than the rest of the world’s population.  This weekend, as I was taking a break from writing this blog post, I went for a coffee and bought the Financial Times. The cover story reads “Moscow’s rich buy £1m entry into the UK – Visa applications by foreign millionaires up 75%. Chinese elite also join rush to settle in London”. As Chrystia Freeland says in her book Plutocrats, ”today’s super-rich are increasingly a nation unto themselves”. A nation of powerful individuals and corporations without a coherent state to regulate their activities.

Take taxes, for instance. Or rather, don’t take taxes, because you can’t. Probably one of the most harmful effects of the rapid increase in the incomes of the global rich is the expansion and size of tax havens. By the nature of the issue, it’s very hard to come up with reliable numbers but the extent of the problem is staggering. The Tax Justice Network estimated earlier in the year that between $21 to $32 trillion has been invested “virtually tax-free through the world’s still- expanding black hole of more than 80 “offshore” secrecy jurisdictions.” Another estimate indicates that “households own globally about 8% of their financial wealth in tax havens ”.  And recently, the parliamentary spending watchdog in the UK released a report outlining the extent of tax avoidance by Amazon, Google and Starbucks – and the companies don’t look good. The report states “Global companies structure their companies in ways that are impenetrable to the public and HMRC [HM Revenue and Custom] disclose very little about their approach to collecting tax from them.“

National concentration of income and rising inequality is very worrying as political and economic processes become biased towards the interest of elites but the evidence from Milanovic’s papers suggest that we shouldn’t forget the rising influence of the global 1%. The absence of systematic international rules allows them to avoid paying their share, while leveraging their wealth even more effectively to increase their benefit and influence. They become more powerful and capable of bending the rules in their favor.

 

This post was originally posted on From Poverty to Power

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