Why is it that economists have got interested in the question of inequality only in the last decade? Equally surprisingly, the World Bank, the institution where you worked for over 10 years, also seems to have discovered the problem of inequality only recently though it has had a sustained interest in poverty.
These are really excellent questions, because they go straight to the political, or even ideological, side of the issue. In the case of most economists, the problem was that when you have a general equilibrium framework at the back of your mind all the time, the two elements which matter for inequality, prices of the factors of production and endowments of the factors of production, are really outside of your realm of study. Let me explain. Prices, such as wage and return on capital, are determined in the market system, whether you like it or not. And how much capital or labour you have is something which is outside of the system: you come to the market with your endowments. Economists thus took both prices and endowments as given because they did not consider these to be within their disciplinary purview. This essentially means that inequality or income distribution have been almost totally left aside by the discipline. When I started writing in the 1990s on the subject of inequality, the topic was quasi non-existent in economics journals. The Journal of Economic Literature did not classify “inequality” as a key word, so you had to use keywords like “welfare”, “education”, etc. One had to be inventive because inequality did not exist!
As to your question with regard to the World Bank, it also worked much more on poverty than inequality because poverty was a “sexy topic”. Everyone liked to be seen as someone who helps poor people. As a friend of mine said once, “Whenever I ask my board members to fund a project that deals with inequality, they always think that I am after their money. When I ask them to fund a project regarding poverty, they all agree and think very highly of themselves.”
When I was at the World Bank, I used the unique set of data there was to measure global inequality for the very first time. I worked almost entirely on my own, with hardly any research support and almost zero additional funding from the special World Bank Research Fund that dispenses literally hundreds of thousands of dollars to help researchers. But I also worked without any hindrance, since no one thought that the topic of inequalities was of any relevance or importance. How times have changed!
You are right, inequality leads us immediately into the world of the rich. Class differences and wealth inequalities are much more difficult to study than the world of the poor, which is much easier to access. But I would like to turn to another of your most striking findings on inequalities, which is that location matters. One’s birthplace will determine one’s life chances and income much more than any other factor. Can you explain this unexpected finding?
Essentially, I found that when you put all the people in the world from every country in groups of percentiles, from the poorest 1% to the richest 1% for each country, and ask how much of the total income of these groups can be explained by the variable of the country of birth, you basically get an answer of 0.6. This is extraordinary! To put it differently, 60% of your lifetime income is determined by your place of birth. I then combined this with some estimates regarding intergenerational transmission of income, namely, where in the income distribution were your parents, etc., and it turns out that 80% of your income can be explained by the two factors of your country of birth (60%) and your parents’ income position (20%). The remaining 20% can be attributed to effort, luck or whatever else is the residual (gender, race).
This finding is especially relevant to the current debates on migration: we need to realise that migration is simply the product of the accident of one’s place of birth.
That is precisely my next question. When you show that place matters above all in determining one’s income, you advance an argument in favour of migration since the only rational strategy is to move to a place where the wages are higher. But you also advocate giving migrants only limited benefits and temporary rights of residence in the host country, rather than the right to acquire citizenship over time. Why do you take this rather provocative position?
It is indeed a very provocative and controversial position. I argue for limited rights and benefits for migrants starting from the premise that migration should be treated the same way as capital is treated: as a factor of production whose movement in the age of globalisation should be entirely free. If we accept freedom of movement for capital, we should also accept freedom of movement for labour. But then, I run into a problem: the populations of recipient countries are unwilling to entertain this idea. We can insist forever that migration will be good for the overall economic growth and for the overall reduction of poverty and inequality, and even for growth in those recipient countries themselves, but if the populations in recipient countries are against immigration, all we we can do is to take this resistance into account. This is precisely what I did, and I came up with my controversial proposal to limit the civic rights of migrants in order to get the domestic population to accept more migrants. I’m arguing in favour of this trade-off between less rights and more migrants not because I am so much in love with it but in order to avoid an outcome that would be zero migration. My position is actually a defence of migration but in a counterintuitive way.
You also argue, like Piketty, that one way to get more equality, more redistribution, would be through higher inheritance and corporate taxes. Do you see any political purchase for these suggestions in the current climate of opinion?
Not much, I don’t, but I am not totally pessimistic on that. We need now a different vision of capitalism. The vision of capitalism with a large redistribution of the current income through taxes and transfers doesn’t work as well today as it did in the past. People simply don’t want to pay taxes at levels at which they were willing to earlier – perhaps because they have less trust in governments.
There is a growing tendency for everybody to be in favour of lower taxes, including those who would benefit from higher taxation of the rich.
Yes, absolutely. This is why we need a vision of a more egalitarian capitalism, which comes from a relative equality of endowments. The actual emphasis should be on de-concentrating capital ownership by extending it to the middle-class. Tax advantages should be taken away from the larger investors and given to the middle class who invest in housing and also financial assets.
Your proposal seems to go in the same direction as Hernando de Soto’s idea of assets ownership, but he was arguing for giving the poor in developing countries greater access to asset ownership, whereas you seem to be arguing for an East-Asian model of capitalism.
That is correct, but let me add one thing. Let’s suppose, theoretically, that endowments of financial capital, housing and human capital, i.e. education, were more or less equally distributed across the population. In such a context, you wouldn’t need a huge redistributive state, and that’s the crucial point. You would have capitalism, libertarianism and communism together. In other words, you would have capitalism, market economy and equality, but a much smaller redistributive state. That would be a really different vision of the future of capitalism, or rather of the capitalism of the future, compared to what it is today.
You see in the economic rise of China and India an important opportunity for levelling off inequalities between countries. How will this come about? And is such high economic growth environmentally sustainable?
The second question is very difficult and I will skip it for the moment. The rise of China and India is, of course, paradigmatic, but we should not forget about Vietnam, Thailand, Indonesia and, more generally, the whole of Asia. It is what I call the rebalancing of the world. It brings the Northern hemisphere, which includes the Eurasian continent and North America, to the redistribution of income that existed before the Industrial Revolution. In other words, India and China will, in a few decades, have the same income levels as Western Europe, which was the case in 1500. One has to see this phenomenon, therefore, in a global perspective and thus as a mirror image of the first Industrial Revolution, which was associated with the rise of the West. Now we see the rise of Asia.
Now, as for the big issue of the big engines of convergence running against the environmental limits, I – we – don’t have an answer to that yet. But focusing on countries in this context is wrong because the main emitters are the rich, who live in many countries. They should be taxed.
I was just going to come to that. Actually, we are comparing the wrong units when we speak of polluters in terms of nation-states.
Absolutely true. Unfortunately, we are still prisoners – or rather, our tools are still prisoners – of what is called “methodological nationalism”. Essentially, all our calculations are done at the level of nation-states and all our knowledge is about different factors within nation-states. For example, the question about how much income is determined by your birthplace could not even be asked at the level of a nation-state because at that level you just compare incomes of different people while absolutely disregarding the fact of the state. It is actually the movement from the nation-state to the global level which yields very different answers – and which also necessitates very different tools. The same goes with climate change: the level of the nation-state is the wrong level for this type of problem.
That is why your book Global Inequality: A New Approach for the Age of Globalization is one of the most interesting critiques of Rawls’s idea of equality in one country.
Some political philosophers have, of course, written about that and criticised Rawls for his Law of Peoples. It is striking that the same arguments that he rejects very vehemently and strongly in A Theory of Justice are then considered absolutely acceptable in the Law of Peoples. Basically, when he moves from the nation-state to the world level, it is as if he forgets about the arguments he made originally. The two books are in this sense quite fascinating opposites.
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