The Wealth Gap Around the World

Branko Milanovic talks about the history of global inequality.

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Innovation during the Industrial Revolution meant food, clothes, and other goods could be produced faster and better, increasing productivity and enriching the world. But some were left behind. The historic economic boom in the 1700s and 1800s also meant a bigger gap between rich and poor. Branko Milanovic, lead economist at the World Bank's research division in Washington, D.C., breaks down this tale of financial disparity through a series of vignettes in his new book, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. Milanovic talked recently with U.S. News about worldwide imbalance and its impact on American politics. Excerpts:

How unequal is the world, really?

It is historically now around the peak of inequality ever.

How did it get that way?

It got that way originally with the Industrial Revolution. So, inequality is not necessarily always a bad thing. Before the Industrial Revolution, you had most of the countries of the world bunched around the same income levels; the Netherlands and England were the richest. The ratio between them and China, which was then the poorest, was 3 to 1. With the Industrial Revolution and development, some nations just took off; others stayed where they were.

What determines change in global financial inequality?

Three forces: One is whether the differences between countries—like U.S. versus Mexico, U.S. versus China, and so on—increase or decrease. The second force is whether inequality between people within countries—like within the United States, within China, within Russia—is going up. The third equalizing force is that poor countries like China and India are growing fast, which means that they are actually bringing some kind of a global middle class, and that reduces global inequality.

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Is the gap growing or shrinking?

I think, actually, so far in the last 15 or 20 years, it has been leveling off with some possible—and, of course, very optimistic—tendency toward decline because of the reason that I just mentioned.

Where is the gap biggest and smallest?

The countries that have the biggest gap are generally in Latin America and some in Africa. The smallest gap is, predictably, in Central Europe and the Nordic countries.

Why is that?

For the countries with the smallest gap, the reason was twofold. First, very widely spread and relatively equal high level of education among people, and secondly, a large role of the state, a redistributive role. When I say redistributive, it does not mean simply the state takes from the rich and gives to the poor. The state merely takes from the middle class in one way and gives back to them in another way, but doing that, it reduces the income gap. Now the countries that are very unequal have, to some extent, the opposite.

Why is it important to talk about inequality?

You can see inequality as being like cholesterol: good and bad. It's good because it does provide incentive for people to work harder and to invest better and to invent things, but then on the other hand, it has a negative impact where you have an entrenched elite that basically maintains its own high position to the detriment of others. You basically run a country without using the talents of these 50 percent of the people who don't have a chance to do something meaningful. And this is bad for your country because there are quite a lot of people who would be smart and hard-working there.

Where does the United States fall?

The U.S. falls somewhere in between. The U.S. still has one of the highest average educational attainment [levels] in the world. But that has been sort of stagnant. In terms of government spending, taxation, expenditures, and so on, the U.S. is a little bit behind Western Europe. Overall ,inequality in the United States is higher than the countries I mentioned before, like obviously the Nordic countries and even countries in Western Europe. [See the top 10 U.S. cities to find a job.]

How can inequality be reduced?