‘Don’t turn to protectionism’

Employment & Income,Inclusive Economy25 Jun 2014Evert-jan Quak

During the EADI conference, The Broker had an exclusive interview with Branko Milanovic, Professor at the City University New York and economist for the World Bank specialized in inequality. According to Milanovic, the overall global inequality trend is good, with middle classes emerging worldwide. However one significant group is not benefiting: the middle classes in rich countries. The fear of a fall back into populism in developed countries and anti-globalization policies could jeopardize the overall global progress that has been made so far.

What are the global middle classes precisely? What do they have in common?

The global middle classes are a heterogeneous group, but it is important that we understand that there is a new rising group of middle classes that may not be related to each other globally, but that have the opportunities to travel, to be educated, to buy more, and to have greater economic stability. You can see this happening all over the world, from Indonesia, China and Nigeria to the developed world. It is always arbitrary where to set the threshold on income to define something as fluid as “the global middle class.” I use the 10-100 international dollars a day range, but this group can also be measured in other ways: assets, occupation, education, housing etc. For the vulnerable group (those living on 2-10 international dollars a day) it is different: they are struggling much more and lack of sufficient income is the greatest challenge to their development. You can also define this group in other terms, like for example the ‘scooter class’ in Indonesia. However, the results can only be used for local circumstances; global comparison will be much more complex using such measures.

China has by far the largest middle class followed by the US. What has caused this rapid rise of the middle class in China, to an extent that has never been seen before in history?

It is economic growth, very high economic growth for 30 years. It is due to this growth, based on the export sectors, that this substantial group has been able to emerge. But we are still talking of a predominantly urban phenomenon.

What is the difference between China and India? India has also experienced high economic growth rates in the past. But, according to your data, its middle class is more vulnerable and remains in the 2-10 US dollar a day range.

India’s economic growth accelerated in the mid 1990s, for a far shorter period than that of China. And the poor in China also had better starting conditions in terms of income and education. China is such a different story; the size of India’s middle class is similar to Mexico’s although India’s population is ten times greater. The picture for India is positive, but it will take much more time for the poor there to reach the level of China. And there is one observation from India that can have an influence on our measurement of the global middle class: it is thought that income (or more exactly, consumption) levels have been underestimated by household surveys in India. I don’t know if this is fully true, but even if it is, it will change some of the conclusions, but not radically. India is still much poorer country than China.

You talked about the US middle class, which has not grown in the last 20 years. Can you say that the middle class in the US is moving more and more into the vulnerable middle class group?

I mention the US because it is such a significant story. There is also far more data from the US, which makes it easier to analyse, but it is also important to focus on the US from a political perspective. The global middle class there is struggling, and the circumstances to build a decent life, in the rich-world meaning of this term, are slipping more and more out of its grasp. This group still falls into the definition of the global middle class, but here you can see the problem of using such a term (“global” middle class) at all, as that group in the US has a higher standard of living than similarly defined groups elsewhere, but its economic progress during the last two decades has been slow, and most importantly, it has fallen further behind the top income earners in its own country.

What about Europe? Is the only difference with the US that there still is some social protection for the middle classes to fall back on?

The general picture in Europe is more or less the same as in the US, but the difference is indeed that there is (still) an active welfare state in most of Europe. Having said that, in the past 15 years in Germany, wage levels have not kept pace with rising productivity. For policy-makers in these countries it is a huge task to find the right policy to change these trends.

What policy is required?

There should be a policy at national level in rich countries that will not harm the progress made in emerging and developing countries. I would especially focus on redistribution via taxation and social transfers, education and innovation policy. However, there is no single nor simple answer. The fear at the moment is that, as a way to respond to frustrated voters, some European parliaments may turn against globalization. The UK‘s threat to leave the European Union, or Marie Le Pen’s claim that her party would abandon the euro are such examples. The return to some form of protectionism is also possible. If it were seriously to occur, it would, in the long-run, harm Europe too but in the short-term arrest the progress of the emerging economies, and thus progress in reducing global poverty. This should be avoided.

But it is not only about national policy. On the global level something has to be done to combat the concentration of financial power, tax havens and some of the negative outcomes of free trade.

Yes, but I am not as negative about globalization as some people are nowadays. It has provided the conditions in which poverty rates are falling almost everywhere around the world. But yes, especially in the financial sector, more has to be done to regulate it and especially to stop further “tax-dollar bloodletting” in the form of offshore accounts that are used to hide the private wealth of the rich. If you look at the UK for example, it is one of the most transparent countries on paper, in the financial sector as well, but like in an onion, there are many layers there. The City of London itself can be in some way transparent, but they make use of all the tricks possible to allow their customers to avoid paying taxes by using external UK territories enjoying a low degree of mainland oversight, like the Isle of Man, the Channel Islands, the Bahamas or the Cayman Islands. The solutions to these issues have to be found in the short term at the regional, EU or OECD, level. I don’t think we can expect any global governance on these issues soon.

This means that there is not only an emerging conflict between the poor, lower and upper middle classes, and the rich. It might be more important to properly address the increasing conflict between the middle classes in developed and developing countries.

The rise of the middle classes in emerging economies goes, it seems, together with a relative decline of the middle classes in developed countries. Is there causality or is it simply a coincidence, an association of the two phenomena? It is very difficult to prove it either way. But whatever the reason, the popular perception is, and will be, that there are some causal channels linking the two – take, for example, outsourcing or global wage competition. Therefore it is important to find common ground for interventions without going back to protectionism. This could be sought, as I mentioned before, in more redistributive policies at the national level that would help or “placate” the “losers” of globalization, and in more active financial policies that would go after the hidden wealth of the rich. This would be a two-pronged strategy that would ensure the continuation of globalization and minimize its negative by-products.

Are you satisfied with the debates on this issue so far within the Post-2015 process?

The focus is still too much on the poor, though it has shifted now a little towards the lower middle classes. However I would like to see a greater effort to include the richer groups as well within discussions on setting a target on inequality. Without including this group you miss the opportunity to do something about the main causes of inequality. However, it would be much more significant if this issue could be put more seriously on the agenda of the G20 and G7.