An interesting fictional dialogue on inequality and convergence
Branko Milanović is an economist specialised in development and inequality. His newest book is “Capitalism, Alone: The Future of the System That Rules the World”
This article is cross-posted from Branko’s Substack blog
Glaucon (G). Good day, Adeimantus. I have a good news for you. Perhaps you have already heard that global inequality measured by the differences in real incomes between people has decreased significantly during the past 30 years and this is the first such big decline since the Industrial Revolution.
Adeimantus (A). Good day to you too, Glaucon. I am extremely happy that this is happening. This simply proves that capitalism works and that the critiques of neoliberal policies were and are wrong.
G. But you know, Adeimantus, that most of the decline in global inequality is due to China and that China did not exactly follow neoliberal policies over that period. Moreover you have criticized China’s policies of state capitalism many times.
A. Yes, I am against Chinese policies and I think they are wrong policies.
G. How can they be wrong, Adeimantus, when you just cheered the decrease in global inequality which was achieved mostly thanks to China?
A. Difficult question, but let us go back to the discussion of global inequality.
G. Wait a minute, Adeimantus. If China’s policies are so successful should not other countries copy them?
A. No, Glaucon my friend, because I know China: China is going to exploit other countries through unfavorable loans. They would not be able to repay them and will get into the vicious circle of underdevelopment.
G. But, Adeimantus, was not the same argument made many times before by the left wing critics of Western loans and which you also many times, here in the markets of Athens, vehemently rejected?
A. Let me say that I think that the situation is different today. I will give you a precise answer later. But let’s go back to the convergence. I am glad that the world is converging but it seems to me that you, Glaucon, are not at all concerned that the lower parts of income distributions of the rich countries have been going down in the global rankings.
G. Sure, Adeimantus. Them going down in the global pecking order is part and parcel of convergence. If you do have convergence that means that some people who used to have income lower than yours will now have income higher than yours, and will thus get ahead of you. So, my dear Adeimantus, you cannot be in favor of global convergence and also in favor of keeping the same people on the top. It is mathematically impossible. If convergence is good then this global reshuffling in incomes is also good.
A. But politically how am I going to explain that the entire distribution of my country is no longer number one, that we are not among the top decile or even top quintile? That creates lots of problems for us internally because the middle classes feel much poorer, relative to the rest of the world, even if their real incomes may still go up. One of the famous writers produced by the island of Britannia, Paul Collier, pines in his book “The future of capitalism” for the time when the British worker could stride the world, standing tall and proud because he was richer than many other people.
G. If he was richer than many other people that means that many other people were poorer than him and these people probably did not like that situation. So now they like the idea of catching up and actually perhaps even being a bit richer than Paul’s Britanian worker. Moreover why should the Britanian or any other worker remain in that top position forever?
A. Because it is very difficult for us to explain it to the population.
G. I understand that, my dear Adeimantus. But this is your political problem. This is not a problem that somebody who cares about global equality and global social mobility is concerned with. From the global point of view, we must treat everybody the same. But let me ask you this: you are, I know that, in favor of social mobility in your own country. You want everybody to have the same chance to succeed. Why should not be there social mobility at the level of the world? What is different there for you to feel bad about social mobility and reshuffling of income positions in the world? If so, should you then be arguing that similar reshuffling must not take place at the national level either? Should you not argue that all people who used to be rich remain rich? If rich countries have to stay at the same positions in the world, why should not rich families stay at the same position within countries?
A. The ships are coming at noon. I have to bid you farewell now. Let’s continue this discussion tomorrow.
Here comes Thrasymachus (T).
T. Hello, Glaucon. I am a bit upset wit you. You have made a big deal of that fact that global inequality measured in relative terms (my income as a fraction of yours) has gone down. But I do not care about that. If we look at the absolute differences in income between people they have gone up.
G. Yes, Thrasymachus, there is no doubt that you are right but this is the case whenever overall real income and real income of individual people increase. Differences in absolute terms go up even if relative differences stay the same or go down. This is like when you take a balloon and draw by pencil different points on the balloon, and then blow the balloon up: what happens? While the relative distances remain the same (or in the case of convergence even go down) the absolute distances between the points on a bigger balloon become greater. But this is okay because the balloon (the world GDP) is greater.
T. But maybe I am a stubborn guy and I just care about the absolute distances and not about relative distances.
G. OK, Thrasymachus, but then you have to be consistent: absolute distances for example in the US in 1860 were severalfold less than absolute distances today. The reason is simply that US GDP per capita was less than one-tenth of its level today and when you look at the distance between any given percentile in the income distribution versus another then and compare those distances to what they are today, they were then very small. (And I am using here incomes that are all corrected for the difference in the price levels and are expressed in current dollars.) But you would not be saying, Thrasymachus, would you, that inequality in a much poorer America with 13% of its population in slavery was much, much lower than inequality today? Would you defend that?
T: Probably not, but let’s go to the global level. Your convergence is mostly driven by China. So other countries have not really converged on Western incomes and Africa certainly did not.
G. Yes, this is a good point. China is really driving the convergence and Africa is remaining equally poor or even the distance between Africa and the rich world is increasing.
T. So I am right to claim that the neoliberal order has actually increased inequality between the countries and people and you get reduced inequality only if China is included. Thus the gap between the core and the periphery is just getting worse.
G. This is not exactly true Thrasymachus because even if China is excluded the global inequality does go down although by significantly less. But then if you expel China from the “developing world” or the periphery because it has become rich, are you not permanently changing your definition of the periphery? Whoever is successful get “expelled” from the periphery, and by that logic there could almost never be a convergence because there would be always some poor countries that would not converge. If India converges tomorrow, you would exclude it too; if Indonesia and Vietnam, and then Bangladesh, come next you would drop them too. So you can never have convergence by definition since every country that converges will be kicked out of your comparison.
T. Glaucon, you make many arguments full of bad sophistry, but although I cannot rebut you know, I will think a bit and come with a decisive proof that what you say cannot be right.
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