Q & A: Talking inequalities with Branko Milanovic

By Ariel Rubin

Branko Milanovic is a former World Bank economist and development specialist. He is currently the Visiting Presidential Professor and Senior Scholar at the City University of New York’s Graduate Center. His last book, “The Haves and the Have-Nots” sought to show how income inequalities are part and parcel of our daily lives.

I sat down with Professor Milanovic in Zagreb, where he had just finished delivering a keynote address at a regional event on inequalities co-organized by UNDP and The Institute of Economics, Zagreb.

The following is a transcript of our discussion.

“People, objectively speaking, do not want to be taxed more”

You’ve talked about how inequality has declined between countries but increased within them. Can you speak about Southeast Europe’s inequality profile? Does the same hold true here?

It is true that in Southeast European countries — if you compare the situation now with the situation 20 years ago — inequality is higher in all of them. It didn’t increase everywhere the same. It could be said that Slovenia still has the lowest rate of inequality in Southeastern European countries. As you go down south , inequality is higher.

But you know none of these countries — even fYR Macedonia which seems to have the highest inequality — are outliers from the point of view of Europe or the European Union. They have something which you could call ‘moderate-to-moderately high’ inequality. In other words, they are less unequal than countries like the UK, the United States, or Israel which are the most unequal among OECD countries.

When you talk about cut-offs to measure the middle class, I think China’s is somewhere between $2 and 4 dollars. What would be the sweet spot of income to measure the middle class here in Eastern Europe and the CIS?

That’s a difficult question and I cannot offhand tell you a number.

Here when we originally started measuring poverty, we quickly realized that basically to have some regional poverty line, it had to be about 4 or 5 dollars per day. So obviously you cannot use the poverty line of $1-1.25 for the countries that are more developed. As, for instance, with Western Europe you cannot use anything below 10 dollars.

Here the exact number is very difficult to pin down. But I think it really depends what you want to study. For example, if i were to study changes in Croatia, or Serbia, or Bosnia and Herzegovina; maybe I should use also the same definition for three of them. But, if I want to look at the change for each individual country, I would take the sort of generally accepted definition of the middle class, which is not based on the amount of money but on median — and taking how many people are above and below 25 percent of that median. So you take a median income, let’s suppose it’s one hundred dollars, and then you say, “Ok, how many people live between 75 and 125?”

And what is interesting in the rich countries is that actually the number of people around that median has, in the last 20 years, declined.

So that’s why we talk about the hollowing out of the middle class, and it would be nice to see if has declined in, for example Croatia, Serbia or Bosnia and Herzegovina — or if it has not.

Zagreb, Croatia 2015 (Photos: Ariel Rubin)

In this region, do you think countries should focus more on the redistributive function of the state in terms of taxes? Or is it more about the equivalisation of endowments?

It seems to me that in this century we have to pay much more attention to equivilisation of endowments and not simply because it is something “good” and because you put everybody more or less at the same starting point: You have the same amount of capital as I do, you have the same amount of skilled labour as I do. But because the limits to higher taxation have been really kind of exhausted.

People, objectively speaking, do not want to be taxed more. They actually feel their wages are already overtaxed. If you tax them even more, investors are not going to come, they would go elsewhere. Similarly, if you tax capital: We know capital is very mobile, so maybe it’s exaggerated and people are not going to move their capital immediately; but, over the longterm, they might.

So as a government, you’re fairly limited in what you can do in terms of additional redistribution that you can get through taxation.

You’ve written before about how widespread migration is a response to an unequal world. Three years ago in your book, you mentioned this really powerful idea that ‘ideas travel freely, people less so.’ Reflecting on what we’ve seen in the last few months, with the boil over in Europe over the migrant crisis, do you have any comments on the state of Europe today?

Global inequality is still mostly about inequality between countries. In other words, meaning Morocco’s income per capita is one-fifth of Spain’s, Albania’s is probably one-fourth of Italy. So these are very strong forces for migration, and consequently when we see all these migrants now — leaving aside people who are escaping from the war because that’s a separate issue — but all the others are really leaving the countries because they’re in search of a better life and because globalization has made that knowledge much more broadly shared and ability to travel is now much greater than it was in the past.

“Ideas travel freely, people less so” Migrants camping in a park in Belgrade, Serbia, August 2015

If you look in the past, obviously people traveled from Eastern and Southern Europe to the United States a hundred years ago; but it was difficult for people from Africa first to get to Europe or to know how to even go there, they would not even know the differences in income.

Now the world has become globalized — and people know it.

So I want to say here is that I tend to view migration as the response — first, to the forces of globalization because labour is the only factor of production that’s not been mobile. And secondly, a response to the very pattern of global inequality where the major contributor or the reason for global inequality is large differences in mean country incomes. Consequently, if we really want to lessen the pressure of migration, we have to work on improving incomes in the poor countries. I think it’s very simple. But it’s hard to accomplish! The idea however is simple.

You mentioned this earlier: the notion of the perception of inequality. When you look on Facebook and realize how much more someone has in another country. It’s also interesting to see how powerful that is with the proliferation of smart phones and access to wireless internet.

It’s very powerful. I read that people in the Democratic Republic of Congo called Europe “heaven”. Because of course they see large differences in income. There are also other advantages: obviously much less disease, many more safe areas, better schools, nicer parks and so on.

Nowadays you really can see in real-time what people in different parts of the world do, where they shop, how the fruits look in their country, what they eat, and what cars they drive. Sometimes maybe its an exaggerated vision of life in the West because they see the consumption part. They might not see actually that you really have to get up at 5am to go to your job.

So they might see a slightly embellished picture of that life; but nevertheless, the fact is, there are big differences.

Continue the conversation on Twitter at #TalkInequality