Has the pandemic, as one might suppose, made the rich richer and the poor poorer, or is this time around things different? And why is inequality so important if the income of the poor is also growing?
Are more and more nations trading a little democracy for a little more economic growth? One of the world’s best economists and the greatest authority in matters pertaining to global inequality, Branko Milanovic, spoke about this for Danas daily.
How has the pandemic affected inequality?
We don’t have data yet on whether the pandemic is over. We can see what is happening in India and it is possible that things that we did not expect are taking place too. But if we look at the rich countries, Europe and America, it is obvious that mortality is higher among people who had to physically go to work, that is, among the working class. On the other hand, countries have allocated huge financial incentives, which in the US alone amounted to 25% of GDP. This is something that has never been done before in history. These benefits set an income limit beyond which no aid was distributed, and this helped significantly to compensate for the loss of wages of people who could not physically go to work because of the pandemic. The results for Germany, France and the UK show that monetary inequality in 2020 was lower than in 2019. So, it has to be said that the poorest are the most affected by morbidity and mortality. Another thing is that financial inequality has been reduced. The same goes for the measures implemented by Serbia. If you give all people money, that is the infamous 100 euros, inequality is automatically reduced because inequality is measured in relative quantity.
Inequality and its impact on economic growth have become one of the world’s major economic problems since the last global financial crisis. However, some believe that it does not matter if inequality grows as long as the income of poorer people and living standard grow. Is this so?
Inequality is important in itself and has negative consequences for three reasons. With greater inequality, the opportunities for future generations born into poor circumstances to go to school, work and earn a good living are diminished. The differences are so great that they also manifest themselves at the family level. Family inequality directly reduces the opportunities for poorer children.
The other thing is the political impact of inequality. The rich want to exert political influence, not because they are bad people, but to maintain economic power. For example, they need political influence to reduce taxes, to secure property, to be able to form a market monopoly. The rich achieve this through money. They either buy politicians, or control them, or elect them….
The third negative effect of inequality is on economic growth rates. It’s more complicated because you still need a certain kind of inequality to stimulate people. Under socialism, everybody had more or less the same salary because there was no incentive to work or invest more. But if there is too much inequality, then there is political instability which causes fear among investors. Furthermore, because of inequality of opportunity untapped human capital leads to a decline in the growth rate. So you can’t say “I don’t care who gets wealthier every year as long as the poorest people earn a little bit more every year.”
When it comes to economic growth, a fairly massive worldwide movement of opponents of economic growth (so-called degrowth) has emerged because of the negative effects that economic growth has on the environment, gas emissions and climate change. If the global economy stopped growing, what would happen to the poorest part of the world?
They don’t think about the poorest part of the world at all and they assume that the rich are rich enough. Their premise is that the rich live well and they don’t need more growth, because that causes gas emissions and climate change. And that is why the developed West should not grow anymore, and neither should the rest of the world. Now, if that happened, then all those poor people in Africa, Asia and elsewhere would remain poor. When you tell them that, their answer is that the richest countries could continue to grow, but the income of the richest people in the world should be in line with the current global GDP. However, there’s a big problem with this – the proponents of this movement don’t see how big the income differences are in the world. If we wanted to stay within the boundaries of the current GDP, we have two options: one is to reduce the incomes of the developed countries from 50 to 60% and then the poor countries could grow to the level of the world average income. Another option is to maintain the current distribution of income in the world, which means that the current poor, and their number about two billion, will remain poor and without electricity, water and infrastructure because the world can no longer handle harmful gas emissions. Both options are extreme and unacceptable.
In practice, we are witnessing a wave of system changes or what Viktor Orban calls “illiberal democracy”. We, in Serbia, are also riding that wave, considering that economic growth has progressed in recent years, but that is why the state of human rights and the rule of law is declining. Do you think that democracy, the rule of law and efficient state institutions necessary prerequisites for economic growth?
I see democracy as a means to a better way of life. I am not convinced like, for example, (John) Rawls that democracy is first of all good. According to him, democracy comes first, economic growth second, inequality third. I think that many nations are kind of trading or exchanging democracy for more economic growth. If we look at China, which is the most economically successful country in the last two generations, there is no doubt that this model of state management of the economy and government dedicated to investment, growth, and employment, exists, even though China is peculiar and it is not easy to transfer its model elsewhere. Also, if we compare it with the loss of human rights, property rights and the lack of the rule of law, that exchange does exist. I also think that Serbia is engaging in such an exchange where greater economic growth goes hand-in-hand with reduction of certain rights and greater arbitrariness in the state’s behaviour than before.
Is the world embarking on a Cold War between America and China?
There is no doubt that the Cold War is emphasised by America because China needs two or three more generations to have unhindered technology transfer, growth and export. The US focuses on this for fear of losing its hegemony. This is not an ideological issue, even if it has been portrayed that way, because the US will not admit that they fear that China could be as strong economically as America, which will happen in 50 years’ time providing China sustains this kind of growth. We are moving towards a Cold War and it is sad.
How do you see Serbia in this regard?
I think people in Serbia don’t understand how necessary it is for Serbia to sit on three or even four chairs: the US, the EU, China and Russia. The policy of choosing one or the other side would be bad. A policy where you have options is not only better because you have a choice, but also because it makes the other side interested in you.
This post is also available in: Italiano