Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic (review)

In the last several years there has been an explosion of mainstream economics literature on inequality including writings by Branko Milanovic who spent decades at the World Bank and is author of the The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2012). His new book, Global Inequality is an excellent complement to Thomas Piketty's Capital in the Twentieth Century (Cambridge: Harvard University Press, 2014), a work which has boosted the momentum for a focus on inequality. Milanovic's timely short book examines changes in inequality focusing on the period since 1988, a period he refers to as a "high globalization" era. He explains the evolution of inequality within advanced economies, an income convergence among nations, and the interaction between them using concepts such as global inequality, Kuznets waves, the elephant curve, the global middle class, global plutocrats, and citizenship premium in five concise chapters.

The analysis focuses on three social classes: the global middle class (urban residents of China and other emerging economies), global plutocrats, and the middle class of advanced economies. "High globalization" benefited the first two classes, and harmed the last group. Key developments include: the high growth rate in Asian economies which boosted convergence and helped the rise of the "global middle class," the weakening of the middle class in advanced economies, the rise of the share of the top 1% in global income and wealth, and the associated rise of inequality in advanced economies. These trends are captured by the "elephant curve" (Figure 1.1: 11) showing the cumulative percentage income gain of the three classes. Using household surveys of income of nations the figure shows that between 1988 and 2008 the real income of the global middle income rose the most, followed by the global plutocrats, while the income of the global upper middle class (the advanced world's middle class) remained stagnant.

Milanovic captures this reversal of fortune for the middle class of advanced countries by the novel concept of Kuznets waves. Historically, inequality rose in the West during the industrialization decades, and started declining in the first half of the 20th century. Kuznets claimed that industrialization caused both income and inequality to increase initially, but eventually increases in income accompanied reduced inequality. This relationship, the Kuznets curve, became the conventional wisdom in economics until inequality started rising in the last quarter of the 20th century. This development led Piketty to reject the claim that the Kuznets curve captured some natural tendency of capitalism, and posited that the decline in inequality experienced by the West was caused by exogenous shocks of the two world wars and the economic policies shaped by them.

Milanovic's comment on Piketty is twofold. Firstly, he contends that the causes of World War I were not exogenous to the economy, and instead the war can be explained by rising inequality and class conflict. He refers to Hobson, Lenin, and Luxemburg to explain how increased inequality within industrialized countries led to imperialism and war. The war unleashed the forces of "the socialist movement, the Russian revolution" and caused the destruction of capital. (98) Consequently, inequality began declining in the 20th century as captured by the original Kuznets curve. Once these conditions reversed, inequality stared to rise again undergirded by globalization and technological revolution. Secondly, this means that increased inequality at present could generate political forces that would bring about another decline in inequality, i.e., a new Kuznets curve, hence the idea of Kuznets waves. Milanovic argues that inequality can decline for both malign (war, civil conflict, epidemics) and benign (labour movement, education, demographic and technological changes) reasons. The second wave of decline in inequality can be caused by any combination of these forces. He summarizes long-term data on changes in income and inequality and the movement of Kuznets waves for six advanced economies in an illuminating manner. (Table 2.2: 88) Unlike Piketty who avoids the...