Branko Milanovic is a Serbian-American economist best known for his work on the issues of inequality of income distribution. A winner of the 2018 Leontief Prize for advancing the frontiers of economic thought, his latest book “Capitalism, Alone: The Future of the System that Rules the World”, was published last year by the Harvard University Press. Milanovic spoke to N1 as part of its ongoing series, “World in Times of Corona,” while self-isolating in his home in Washington.
Mr Milanovic, it seems that, on top of the coronavirus pandemic, there is also a pandemic of sorts of opinions, comments, analyses, and visions from all over the world guessing where this crisis will take us. You say it is difficult to predict while we’re still in tapping in the dark because much of what we say today will be proven wrong tomorrow, or we will be right, but it will be a lucky guess. How much light can we see in this dark we’re in, or is reaching the light going to be more complicated?
If we’re looking at this situation as a very long drive through a tunnel of sorts, and Italy has been in it longer than us, we do see glimpses of light, but we are far from reaching the end of the tunnel. Talking about the effects of the pandemic on the future of economy, it’s becoming clearer and clearer that, when this acute phase is over, it would be wrong to assume w would just go back to normal. There may still be isolated eruptions of infection, like what is happening in China now, carried by those coming in from abroad. Things will not go back to normal as far as the changes in economy that already happened are concerned either, such as closing the borders, rethinking the global chain of value, banning exports of various materials or medicines and so on. Take terrorist attacks for example.
I remember when that began in the 70s. First, airport security was increased. Young people today can’t believe when I say that plane travel in the past looked like bus travel now. Then, things changed. And after 9/11 happened, again an entire set of security measures and demands were introduced, all of which have been normalised now, such as taking off your shoes, dose limits on liquids, new x-rays. I believe this pandemic will lead to something similar. Increased control, everywhere, to control the contagion.
This crisis, you wrote, is different from anything we have seen so far in contemporary world and it is impossible to analyse it, as well as its consequences, exclusively from the perspective of macroeconomics. There is a lot of talk about paradigm shifts, do you dare give a scenario on how things would change?
It seems to me all of that is still quite far away. It looks very nice when I or someone says these days that, yes, there will be a paradigm shift, but when you ask what does that mean, specifically, it becomes very difficult to explain right now. A lot of people are talking about it.
Take climate change for example, a lot is being written about that topic in this context. Then you set it up this way – we want to fight the climate crisis, we want to reduce the correlation between human activity and CO2 emissions, well then that means reduced incomes for a great number of people and reduced incomes in developed countries, because they create the most emissions.
The problem isn’t in reduced incomes in Africa, since they don’t have high emissions. And then it becomes politically completely unacceptable, because, who is going to agree to cutting their GDP by 10, 20 percent? Moreover, if we say, we’re not going to leave this social product that exists in the world, and we’re unable to politically reduce the social product of the West or in rich countries, does that mean we should condemn poor people to live in poverty forever?
When we’re talking about paradigm shifts, people usually have god intentions, but they don’t want to think about the numbers. Therefore, I don’t think we’re close to a paradigm shift, but there will be other changes, such as a reduction in globalisation, thinking that even though we have globalisation, it can make us a lot less flexible.
Concerning the disruption in the global supply and demand chain, if the crisis lasts, what could be the impact? The virus came from China, the world’s factory, and travelled to the world’s consumers in the West.
I remember, more than two months ago while China was still going through the crisis, I came to a shop in Washington to buy something and the salesperson told me they were out because production had been halted in China – the chain was broken. I think situations like that will happen more and more. In my latest book, I write about a global values system which is absolutely crucial to expand the capitalist means of production and capitalism itself in all other countries. Take not just China, but also Laos, Myanmar, Vietnam.
But, we are based on the assumption that the situation will always be “normal,”in other words, costs are minimised under the assumption that there are no great shocks. When a shock such as this one happens, then there are no back-up plans, no way of continuing production, because all of your production is so well- organised economically, that it is optimal. But, if anything changes, production collapses. We’ve seen a similar thing happen when the Soviet Union fell apart. The chain may have a hundred producers, but if one is missing, you’re immediately at zero. In the Soviet Union, the scenario of the O-ring economic theory happened, the same model which led to the US Challenger accident: when one small part isn’t working, everything else goes down to zero.
What are the parameters in which we should look at the damage the crisis will cause? Can we only look at the situation through the prism of financial instruments and GDP, the way we looked at the crisis a decade ago?
I think this crisis is different from the financial crash of 2008/09. First and foremost, of course, now we’re dealing with the issue of public health, there are many fatalities, but it’s also different in its consequences. Back then we had a “standard” financial, banking crisis, which was fixed through standard macroeconomic instruments, whether those were quantitative subsidies, increasing the amount of money in circulation, ensuring the security of the banking system. This crisis is crisis of both supply and demand. When I say supply, it means it’s a crisis of production.
If people aren’t working, can’t go to work because of the contagion and everybody is sitting at home, then you don’t have labour, meaning you don’t have production. What happens then is the crisis in demand because incomes drop, people don’t have enough money to seek out goods and services, therefore we have two crises. The belief that you will fix the crisis in production purely through financial means, be it from the budget, financial mechanisms, or monetarily, is an illusion. Of course, you have to do something urgently, you have to pay people even if they’re not working, but you can’t assume that, in a crisis of production, if you reduce for example interest rates, give someone a loan without interest or just hand our money, that production will resume tomorrow in full force. It’s a lot like war. If you tear down a factory, you can give it all the money in the world tomorrow, but that factory won’t be able to reopen right away.
That’s why we are looking at a big difference in approach compared to the crisis from a decade ago. Looking at Europe, some national measures that were introduced are pretty good, such as guaranteeing 70-100 percent pay for furloughed workers. For me, that’s key, you have to keep paying people because otherwise they won’t be able to afford rent or food.
In the United States the situation is a bit different, because a large chunk of the two trillion dollars in approved aid went to businesses and corporations. The idea was the following – we give money to businesses so that they wouldn’t go under – take airline companies which are all grounded now – in that way the owners and companies would survive and hire people back.
What are the effects of the pandemic on global income distribution and inequality in general?
That is the most difficult part because no one can see it clearly yet. I think it’s more or less clear for countries such as the US that the first effect will be income reduction on top because the stock market is falling and total wealth was reduced. Also, we can expect unemployment to skyrocket in the following months, there are significant income reductions for lower middle and middle classes. The situation is really bad, the losses will be absolute and they will reach even those who were not hit directly by the crisis – like you and me for example, who can work online from home. Inequality will rise within countries. This will happen more or less across all countries, because unemployment and income reduction will impact the majority of people.
What about inequality in different parts of the world?
If everything is over soon and the infection does not spread in a way we have seen so far in Europe and America, then the effects would be following – a drop in GDP in developed countries will be more significant. China is partly recovering and in that way, and this is a bit ironic if it happens, the slowed-down or negative growth in Europe and America will mean that the difference between them and the growing economies of Asia – became smaller.
Take Vietnam, for example. The epidemic did not hit the country very badly and it continued its growth rates of six or seven percent; it will get closer (to Europe and America). In the EU, even though we cannot estimate precisely, there are some estimates on a quarterly drop of twenty percent, but on the annual level it probably won’t be so big. The irony is that in that way, inequality will be reduced. As far as the drop is concerned, we shouldn’t give it too much importance right now, everyone is talking about one year; now the question is how countries would get the revenues they need over two, three years, because this shock is too big and did not last long enough for us to be able to draw any conclusions.
How will we look at social ties that are important both for the economy and the fabric of societies themselves?
It will be very difficult, that is why I think that the return to globalisation and growth will be much slower, because those connections won’t be re-established immediately to the levels we’re used to. If we look at our lives, when the acute condition is reduced, we definitely won’t go back to shaking hands, touching each other or meeting in large groups the way we used to, without a second thought for the possible consequences. Many people will rethink whether they should go to that concert or this soccer match. If we create a vaccine or the virus goes away for at least six months, everything will, gradually, relax.
In the context of the crisis, many people are questioning the model of growth and evaluating economies solely on their GDP, what are your thoughts on that?
When you asked me about paradigm shifts, I mentioned the issue of globalisation, the global chain of values, ability to travel, but I don’t believe all of this will result in such a change in our thinking that we will go – yes, this is really terrible and we’re being punished for treating nature poorly, let’s stop working towards having a high GDP and being rich and just go live in a forest. It’s clear that today, while the pandemic lasts, it’s better to be without specialty and to have a little house in the forest with your own water, food, electricity generator, no social contacts. You’re safe, you don’t need anyone, you’re far away from the virus. Therefore, things are better for those people who are not a part of the economic machinery. But, when this acute part is over, we will go back to specialisation and the advantages of living in big cities. I don’t see that this will have such an impact that it will change the way we think.
When you talk about the slowdown in globalisation, is the position on the future of multilateral, especially economic and financial, institutions any clearer?
That’s a big question. The crisis exposed their immaturity. IMF did not look very good during the European crisis, on the issue of Greece, it was criticised a lot because of the measures it supported together with the European Central Bank and the focus on giving money to Europe, which did not go unnoticed in Latin America and Africa. Now, a new problem will arise with the number of countries which will ask for help. I’ve seen the number; some 60 countries are standing in line at the moment. It’s also unclear what the politics and the role of the European Central Bank will be in the future. All the problems we’ve seen with the crisis ten years ago will now resurface even stronger, because this crisis is much deeper and hits many more countries.
This is an election year in the US, we know that Trump’s Democratic challenger will be former Vice-President Joe Biden. Trump’s rating is still good considering the scope of this crisis and the impact on the American economy. How do you predict the story ending given the influence of the US on global economy?
One of the tragedies of all this was that Trump is the one in power, because his reaction was inadequate. The entire crisis has been minimised for two months and, instead of preparing the country for the impact, Trump has replaced the complete leadership of the CDC. It’s incredible he even pursued that. The choice between him and Biden, both in their 70s, with Biden who can barely speak and Trump who so often speaks untruths, is not cause for optimism. I think this crisis in America will have enormous consequences for global economy, because it remains the strongest global economy, followed by China. Unless this lasts longer than two quarters, we’ll see some improvements and we’ll begin to get over the crisis. When we look at the graphs five years from now, it will be very clear that this was an enormous shock that global economy did not have. We’re all in an unclear situation, I said this at the beginning, like we’re in a tunnel and now we’re trying, like we’re in Plato’s cave, discern shadows, but we still cannot tell if the shadows are something real or not.
