Social Consequences of the Pandemic "The Super-Rich in the West Are Evading Their Responsibility"

Former top World Bank economist Branko Milanović is afraid that the coronavirus pandemic has deepened the wealth divide. Those who have profited most from the crisis, he fears, have broken their pledge to help countries in need.
Interview Conducted by Martin Hesse und Michael Sauga
COVID-19 victims in New Delhi: "The gap between rich and poor countries will widen further."

COVID-19 victims in New Delhi: "The gap between rich and poor countries will widen further."

Foto: Amit Sharma / dpa

DER SPIEGEL: Mr. Milanović, emerging countries like India and Brazil are suffering badly from the pandemic, and far too little vaccine is arriving in poorer countries. Is the coronavirus pandemic widening the gap between rich and poor?

Milanović: That is to be feared. However, the situation can change quickly. In South Africa, for example, where the pandemic only recently spread rapidly, the situation has improved significantly.

DER SPIEGEL: Global inequality has decreased in the world over the past few decades, primarily a function of China’s rapid growth. Will that continue after the pandemic?

Milanović: No, China is now a global middle-class country. If it grows strongly, as it has recently, it will increase global inequality, not decrease it, as has been the case during the past 40 years. At the same time, countries like India, which is likely to experience two years of strongly negative growth, are falling behind economically. The bottom line is that it is to be feared that the gap between rich and poor countries will widen further.

DER SPIEGEL: The big tech companies like Amazon and Google are making billions in the crisis, and employees in other industries are losing their jobs. Has the virus also made the rich richer and the poor poorer within countries?

Milanović: Not in general, although it is still too early to draw strong conclusions. Recent studies show that inequality is falling in many Western countries thanks to huge government aid programs. On the other hand, it can be observed that the super-rich in the Western world are evading their responsibility. They did not live up to their own claims during the pandemic.

DER SPIEGEL: What do you mean by that?

Milanović: I can still remember how the global elite promised in large public appearances at the World Economic Forum meeting in Davos that they would use part of their wealth to fight emergencies. Unfortunately, little of this has been seen in the past few months. Words and actions have been far apart. The inaction of big money in the U.S. was particularly noticeable.

DER SPIEGEL: The wealthy in industrialized countries have become even more affluent in recent years.

Milanović: The income elite in the West today typically benefit from high investment income and growing income from work at the same time. This applies to chief physicians, star lawyers or software developers, for example. This is a new phenomenon. In classical capitalism of the 19th and 20th centuries, only entrepreneurs and capitalists were at the top of the income pyramid. The change we are witnessing, though, is a long-term trend that is exacerbated by the pandemic – for example, by the boom on the stock markets.

"The pandemic has shown that you can work from practically anywhere in the world with the help of modern means of communication. As a result, something like a global job market is emerging for the first time in many professions."

DER SPIEGEL: Which deepens the gap between rich and poor.

Milanović: That's right. But this change also has positive sides, because it levels out the old opposition between capital and labor. At the same time, it protects the elite, say, the top 10 percent, from losses because their prosperity comes from several sources, both from high labor and from capital incomes. That makes the privileged classes even stronger economically - and politically more influential.

DER SPIEGEL: The traditional middle class, on the other hand, has suffered economic losses over the past few decades. Will this development worsen?

Milanović: There are a number of signs of that. The pandemic has shown that you can work from practically anywhere in the world with the help of modern means of communication. As a result, something like a global job market is emerging for the first time in many professions. This is bad news for numerous professional groups in the West who have not previously had to fear global competition.

DER SPIEGEL: You believe that salaries may go down?

Milanović: Not only that. Those who live in Delhi and email their reports to Düsseldorf have a much lower cost of living than their local colleagues. This can lead to the paradoxical result that equality grows globally, but the middle class in the West suffers.

DER SPIEGEL: How should governments react to this?

Milanović: It would make sense to make it easier for lower-paid workers to access capital income. For example, through tax advantages or a promotion of worker shareholding. Education is even more important. Today the elites of the West use their wealth to buy their children access to the best schools and universities. This isolates the top 10 percent even more from the rest of the population. It reduces the chances of advancing socially and leads to a new form of rule by the money nobility. I call it homoplutia because the elite is wealthy (plutia) in terms of both financial and human capital.

DER SPIEGEL: The pandemic has affected the education systems of many countries. Classes were either completely suspended for months on end or only partial instruction was possible. Does this reinforce the trend?

Milanović: I'm afraid so. The educational misery hits poorer families harder. The wealthy can more easily compensate for missed lessons with tutors, and they simply have more space at home, which makes homeschooling easier.

DER SPIEGEL: In the United States, the rich are said to be paying higher taxes for the first time in decades. Will that reduce inequality?

Milanović: I am pleased with Joe Biden's proposals. It is right to raise corporate and income taxes. There are also discussions about strengthening the unions and investing heavily in infrastructure. The global minimum tax is also to be welcomed. Perhaps U.S. inequality has indeed peaked.

DER SPIEGEL: In your book "The Clash of Capitalism” you describe the two formative forms of capitalism: the liberal-meritocratic American capitalism and the state capitalism of China. Which one is better suited to solving the problem of growing inequality?

"The EU should promote investments in Africa and cooperate more closely with China."

Milanović: In both countries, inequality has increased over the past 20 years, in China even more than in the U.S. This is mainly due to the fact that China is starting from a lower level and the gap has grown due to rapid industrialization and urbanization. This process is not complete. Also, the economic and political elites have become mixed: private entrepreneurs have gotten very rich, but party membership is still very useful, especially – and this is quite interesting – for the rich entrepreneurs. In the U.S., on the other hand, the economic elite manage to buy a policy that serves their interests. With regard to the U.S., I am a little more optimistic that politicians are now taking countermeasures. In China, the fight against corruption, to which the government has been committed for some time, gives hope. I think politicians in both countries understand that you can't just watch inequality grow.

DER SPIEGEL: Europe has lost ground to the U.S. and China. Has the European social model grown outmoded in the face of increased competition among the major economic blocs?

Milanović: It is undoubtedly under pressure, due to migration, but also because with the entry of China and India into the global economic system, the factor labor was weakened compared to capital. Economically, Europe is more liberal, in the economic sense, than it was in the 1970s, and the influence of the trade unions has declined. But the welfare state is such an essential part of the European worldview that it will not be abandoned. And that's good.

DER SPIEGEL: Africa is at risk of being left behind economically as a result of the pandemic. What does this mean for Europe?

Milanović: The stark income gap between the European and African Mediterranean coasts could shape the relationship between the two continents for a century. Where does an investor invest when asked whether he would like to get 1 percent return or where he gets 10 percent? It is the same with wages and salaries. Of course, this is the reason why people are drawn to Germany, France or Sweden, where they can earn many times what they get in Africa. That remains a driver for migration. Europe should have the greatest interest in improving the situation in Africa.

DER SPIEGEL: What would be the best way?

Milanović: The EU should promote investments in Africa and cooperate more closely with China. Instead, it has made itself hostage to Turkey in terms of refugee policy.

DER SPIEGEL: Europe shouldn't just leave the African continent to China?

Milanović: China is not the neo-colonial exploiter that many in the West see it as. On the contrary. China's involvement has increased growth in many African countries. Europeans also benefit from this.

DER SPIEGEL: Mr. Milanovic, thank you for this interview.