«If you have people who lose every hope of getting a new job, the social fabric starts to break down.»
Branko Milanović looks at long-term developments. For decades the economist studied inequality, poverty, and global trends. His most recent work, «Capitalism, Alone», explains the triumph of capitalism and shows that little will change. This also applies to globalization, according to the professor of economics. Despite the current crisis, capitalism nor globalization will lose importance in the long term—the more significant threat he sees for society.
Mr. Milanović, how will the coronavirus outbreak affect the economy?It’s too early to say. We don’t know what the effects will be in the countries that have been affected. Much less do we know how far the virus will keep spreading. Africa and India are in a huge danger.
Branko Milanović (66) is an expert in income inequality. He has studied the subject since his doctorate at the University of Belgrade in 1987. He wrote several books and won numerous awards. Famous is his «elephant graph», which shows that lower classes in industrial nations haven’t benefited much from globalization in the past decades. Milanovic is a professor at the City University of New York and teaches at the London School of Economics. Previously, he was head of the Research Department of the World Bank.
What’s your guess regarding the impact on global inequality?
The loss of income in percentage terms is likely to be larger in Europe and the US compared to China. The effect would be similar in terms of the redistribution of economic power to what happened after the Global Financial Crisis.
What happened back then?
The Global Financial Crisis hit rich countries harder. Although the crisis weighed on China’s growth rate, it continued growing faster than rich countries.
So global inequality will decrease.
The main engine of the reduction of global inequality since 1990 was the high rate of growth in large Asian countries like China, India, Indonesia, Thailand, and Vietnam. Combined with low growth in the advanced economies. That seems to be maintained or even exacerbated by the crisis. The crisis most likely will lead to a convergence of incomes. A convergence of incomes between Asia in Europe means a reduction of global inequality.
What about income within countries?
Within countries, inequality will most likely increase. Despite all the bills that were passed to help people with very modest incomes and people who have lost jobs, the unemployment rate will shoot up, and incomes of many people who are depending on their weekly or monthly wages will be severely reduced. That tends to increase inequality.
What about the effect on capital income?
The effect is also somewhat similar to the global financial crisis. There will be a loss of capital income and wealth at the top of the income distribution. Those two effects might affect both the sort of middle of the income distribution at the top.
How do you rate the handling of the Coronavirus Outbreak in China?
It’s important to highlight two big failures. First of all, after the outbreaks of SARS and the avian flu, the government did not regulate the wet markets. It is known for twenty years that they are a source of danger. That was a huge omission.
And the second failure?
Secondly, the reaction was very slow. I attribute this to the Chinese system. The center tells the local authorities that peace and order in their area are their responsibility. If anything unpeaceful happens, the center is not interested in why it happened, but it is the local authorities who have to deal with it. Under that system, provincial level and county level authorities have any incentive to diminish any problem. That is a systemic failure of the system. So these are two massive failures that have led to the crisis.
On the positive side?
Thanks to the system of decentralized control and the ability to project its control to the very low level, China was able to master and mobilize forces that other countries were not able to. And not only to mobilize them but to continue using them.
Can China maintain a high growth rate?
China will continue with reasonably high rates of growth. Because China is becoming more developed, it cannot grow by 10%, simply because technological progress does not rise at the rate of 10%.
How fast will China grow?
Chinese growth will slow down, but maybe not as much as some people think. China has been able to move to top technologies like artificial intelligence, robotics, and all the internet-based communications. These are things which people 15 years ago were not expecting because they thought that China would go through the sort of a natural process where it goes from low value-added to a little bit higher value-added, like cars. But China went past that straight into the top Technologies.
Will China move more toward a democratic system?
The crisis has enforced a positive side of the Chinese system. But it has also shown deep-rooted questions about systemic failure, which has led to many deaths in China and even more deaths in the rest of the world. Is the political system in China an externality to the rest of the world? If a country generates a crisis like that, which becomes global, It’s no longer your problem. It’s the problem of the rest of the world. I don’t have an answer, but it’s something that one has to take into account.
What should governments do to address this crisis?
Every bill in emergency conditions like these has to target individuals. They are losing jobs and incomes. It is also essential for social peace and cohesion.
What do you mean?
Mass unemployment might lead to riots and social anomie. That’s why the government should focus on people. Ironically the government has to pay people not to work. When the government pays people unemployment benefits or assistance, it generally expects some quid pro quo, like looking for a job. But in this case, the government has to ask them not to work because they lost jobs and not to look for a job because they need to stay home. People staying home without any source of income is a recipe for disaster.
Is this happening in the US?
The US relief package targets individuals as well as companies that have been affected.
What is the logic behind targeting companies?
The logic is that the government doesn’t let them go bankrupt, and they will be employing people. But that’s faulty logic. Companies like Airlines are not going to hire people whom they don’t need now, they’re not flying anywhere, or they fly without passengers.
What about in Europe?
Targeting people is generally being applied. There is compensation for a percentage of the income that is being lost. The targeting is more towards individuals.
It’s like a temporary Universal Basic Income.
Something like that. I was not particularly in favor of the UBI. But these are extraordinary conditions. and in situations like that, you cannot go with economics as they were before. It’s like wartime economics. Now, UBI would be a good idea, a temporary UBI, as you said.
How big of a threat is this pandemic to society here in the US?
It should not be disregarded. So far, the social situation in the US as well as in Italy or Spain has more or less been normal. But there is a threat to society, particularly in more unequal countries. If you have people who lose every hope of getting a new job, the social fabric starts to break down.
Can you be more specific?
What happens when in Baltimore, New Orleans or LA people who don’t have an income break into a grocery store? We have had cases like that in southern Italy already, very few, isolated incidents. But the longer the crisis goes, the greater the likelihood becomes. You can deal with that if it’s one case or two cases. If it becomes more frequent, than you have a situation like the one New Orleans faced after Katrina with a breakdown of Law and Order and the National Guard had to be sent. It’s not a negligible danger.
What about outside the US?
The danger is smaller in countries that are richer and more homogeneous. But for example, in France, there were riots a couple of years ago in the Suburbs. And then there were the Gilets Jaunes. The danger ist lower at the peak of the pandemic as people are fearful. But when the situation gets slightly better, we might have outbreaks of violence.
Do you expect any long-term consequences of the crisis?
We tend to overestimate the short-term impact. We have focused on what is happening now and in the next year. First, there is going to be some inflexibility. It will take some time before all these measures which have cut travel are lifted. Even when the crisis subsides, we won’t go back immediately to where we were before.
And in the long run?
If it’s handled within a year or so, there won’t be dramatic changes over the longer term. Capital has an interest in moving, and to make money, people have an interest in moving and to generate higher incomes. There could be some changes in the risk perception from the geopolitical point of view, whether a nation wants to depend entirely on one country.
Don’t you expect a broader shift in globalization?
Not if you take a perspective of five years and more. The underlying forces, which are technological and institutional, are still pro-globalization.
Could you elaborate?
Technological it’s the ability to control the production from a distance and institutional is the existence of the framework which protects property rights around the world. Karl Marx said that if you have a global economy, technological advances cannot be undone. The knowledge is there. If you have an economy that is not globalized, technological advances can be forgotten. That happened when ancient China or the Roman Empire descended into an inferior type of system, and the technological advances which existed were forgotten. In the case of Europe, they had to be reinvented like a thousand years afterward. In a globalized economy, technological advances will not be forgotten or lost.
Do you expect any shift in consumer behavior?
I don’t know. Memories are generally quite short. People tend to react very strongly to a negative or a positive shock. But they sort of go back to the pattern of behavior they had before. In the US, depending on how they handle the crisis, I rather expect to see a push towards a Public Health system. The health system has been a problem for decades. The system is extremely expensive and does not deliver the outcomes in terms of life expectancy that much cheaper systems can provide.
Why is Capitalism the dominant system?
Capitalism has been able to fulfill the needs for growth and income. There is also an overlap with people’s value systems. Otherwise, the system could not be maintained. The value system that Capitalism promotes is a value system that puts income and wealth at the top. That’s very egalitarian. It doesn’t have nobility, clergy, upper classes, or casts. If you have money, you can be whatever you want to be. And it is the system that fulfills human needs more effectively than any other system like communism or more traditional systems, where you have cast structure, or a three partied structure.
Nevertheless, Capitalism is under pressure in the US.
Bernie Sanders and others who talk of Socialism should be talking about Social Democracy. That is what they envision. It is still Capitalism. What the left of the democratic party wants to bring into the US is a much more benign and more developed capitalism, which would work more in the interest of people then the more oligarchical plutocratic Capitalism that exists in the US.
Capitalism is dominating every sector of life. Even private life is being commodified. Is there any way to dial this back?
Technology has made this commodifying possible. Many of the activities which were done in the past in a household, which were not commodified because it was the function of the household, now can be commodified. You can commodify your provision of food, taking care of the elderly or the children, cleaning, taking your dogs for a walk. It can be done thanks to technology, which enables us to inform people of our needs in real-time once certain things are feasible technologically. You cannot just turn them off. There would be an incentive to use them.
Is there any chance for a society to recuse itself from this economic pressure and Capitalism?
Technically yes, but it’s not a viable option. Before the virus, Italy was the country where the way of life, general prosperity, and enjoyment was probably the highest in the history of the world. A high-income country with excellent facilities, great food, beautiful location, and ancient history. But Italy has not grown since 1999.
What if Italians are happy with the way they are living?
They can’t continue to live like that. In a globalized world, you have other people who actually would gradually have more income than you come and buy things that you are enjoying. In Venice, foreigners have bought lots of Apartments, many of these apartments are either empty or used as AirBnbs. You have seen the same thing in Barcelona. Even if you’re happy with your way of life, the economic pressure from the rest of the world is such that gradually certain advantages of that kind of living would be gone from you simply because somebody will be able to pay more for that. It’s very difficult for a country and for people to exclude themselves from this race.