This is part of a series, ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists

A chart first brought economist Branko Milanovic to worldwide attention. In 2013, the former World Bank economist and his colleague Christoph Lackner captured in a simple picture how global growth in two decades of rapid globalisation had accrued to different global income groups. This “elephant chart” showed that between 1988 and 2008, the large middle of the world’s income distribution had enjoyed strong income growth (the elephant’s raised back) but not the world’s very poorest (the sloping tail). What resonated most in rich countries was the low base of the elephant’s trunk, which illustrated that their middle classes had suffered income stagnation, and its high tip, which showed the outsized gain of the world’s very richest.

The chart seems to make sense of the voter backlash that won the UK’s Brexit referendum and the US’s election of Donald Trump. But it also helped to draw attention to a burgeoning field of inequality studies in economics, exemplified by the runaway success of Thomas Piketty’s Capital in the 21st Century. Milanovic, now a professor at City University of New York, has been a central contributor to inequality research. Originally from Serbia in the former Yugoslavia, he has among other things gathered and analysed data on inequality in the countries of the former eastern bloc.

He brings readers broader perspectives than most western economists — from his decades-long work on inequality to his latest book, Capitalism, Alone, which analysed the variants of capitalism, which he argues is now the only socio-economic system on offer from China to the US.

In this conversation, which was recorded before Russia’s invasion of Ukraine, he argues that globalisation is here to stay, but that the forces we have seen reduce global inequality while increasing it within individual countries, have ebbed. China will no longer contribute to falling global inequality, he argues, unless it does so indirectly by helping Africa grow strongly. At the same time, Milanovic says a backlash against rising inequality within countries is behind the return of more interventionist policies in the west.

The discussion also looked into the differences between the US and China — both, in his analysis, forms of capitalism, but with different power hierarchies between the state and private companies. The big question is whether China can continue to grow at a sufficiently impressive rate for its type of “political capitalism” to be an attractive model for other countries to emulate.

Martin Sandbu: What have we learnt recently about the state of inequality in the world? Where do you see things moving? 

Branko Milanovic: I think a change happened around the global financial crisis. It revealed that the middle class, particularly in the US, really did not have a very good period over the last two decades and in part that absence of growth was covered up, camouflaged, by the ability to borrow.

When the crisis happened, that ability evaporated. Many people lost homes, they realised that the top 1 per cent first did very well, and they believed that many of the top 1 per cent were indirectly responsible for the crisis.

So that was the fertile soil on which subsequent work was then done, in particular by Thomas Piketty. 

Then, of course, the work of others, including myself, also became much more relevant and then the elephant chart, which actually extended this whole thing and suddenly brought all these disparate pieces of information together. 

MS: Let’s stop in 2019, because Covid has scrambled things. What were the main traits of development globally and domestically in the decades up to 2019?

BM: The main trends first are the decline in interpersonal inequality globally, between individuals globally. It was driven essentially — but not entirely — by China. It was then driven by India’s growth pick-up in the 2000s and by really strong growth in Vietnam, and Indonesia, which is forgotten, and Thailand, and basically Asian countries that were relatively poor two decades ago and then became rich.

So that was the force behind it. The offsetting forces were inequality increases within big countries such as China and the US but they were not sufficiently strong, because Asian economic growth was very strong and basically drove global inequality down.

However even before Covid, China was in a position where it could no longer contribute to the reduction of global inequality. It was not raising it because it was not sufficiently rich, but probably in five or ten years it will start increasing global inequality because the distance between China and India, Nigeria and Ethiopia and so on would become greater. And consequently the fact that Chinese growth is making China more similar to the rich countries would be more than offset by the fact that China has become further apart from the poor countries.

MS: There are still a lot of poor people in China.

BM: Yes, but when you look at global inequality, the Chinese income distribution now is basically between the median and the mean. Arithmetically, China is no longer a contributor to falling inequality. Once we take China out of the picture, the next engine of global inequality reduction is India, but India’s growth started sputtering even before the global financial crisis.

And the following engine, which is really quite important, is Africa. I have in mind large countries such as Nigeria, Ethiopia, Sudan, Congo, and South Africa. These are countries with a large population increase in this century, certainly the only part of the world which will grow in terms of population.

So if we really want to continue with global inequality reduction, leaving Covid aside for the moment, we need to count on India growing fast and Africa growing very fast. When you translate that into growth rates that are needed for Africa to achieve this, these per capita growth rates are 4 or 5 per cent, which means 6 to 7 per cent overall for the GDP, or even 8 per cent. These are not growth rates that African countries have historically been able to sustain over a ten-year period, much less over a 20-year period. So I became relatively pessimistic about the ability to maintain the trend of declining global inequality.

MS: In your book, Capitalism, Alone, I think you are saying that as for what could potentially drive this, there is really no choice between economic models, there are just two versions of capitalism. But in a broader sense than the old literature about varieties of capitalism in the west, of course. A lot of people will say, look, the Chinese system is deeply, deeply different from the western system. Can you just explain how you see the similarities and differences between the two systems you’ve set out?

BM: Yes, but what I just said about global inequality, I think, fits very well with your question about China, because if you question whether the trend of global inequality may be reversed and then come to a conclusion that it all depends on India and Africa, that’s where I think the Chinese role comes in.

If China is able, through the belt-and-road initiative, to jump-start growth in Africa and to apply its own lessons in Africa, and if China is able to push the US, as it did actually, to change the approach to development in Africa and in poorer countries in general, then I would see the Chinese influence as a very positive one. It would have, either directly by its own investment or indirectly by pushing the US to be more responsive to the needs of the poorer world, increased the rate of growth of the poor and hence contributed to the reduction of global inequality.

MS: China’s influence, it seems to me, is a reflection or a function of its own success domestically because that makes it an attractive model to emulate. So, what are the important characteristics of the Chinese model?

BM: I have three characteristics in Capitalism, Alone. The first one is an efficient bureaucracy which delivers or tries to deliver economic growth. The second one is the absence of the rule of law and the third one is the autonomy of the state. The absence of the rule of law doesn’t mean obviously that there are no laws. It simply means that in particular cases the law is either applied or not applied depending on the preferences of the elite or depending on what is their judgment of the situation.

You have a bureaucracy that in principle is a Weberian type of bureaucracy that follows the rules, but the fundamental absence of the rule of law means that actually these rules cannot be followed all the time.

It’s in the contradiction between these two that, I think, corruption comes in, because corruption can be used as a means to not apply the law, to actually buy the law, if you will.

The autonomy of the state, I think, is a very interesting and important characteristic because in my opinion, it has always existed in China and differentiated China from western Europe. For example, even under the last dynasty, the imperial administration tended to side with workers in the case of strikes.

The state always had an autonomous function with regard to capitalists and merchants in the past, keeping them at a distance and not letting them control the policy. I think this is actually a long-term feature of the Chinese system.

MS: But to be clear, you think of it as capitalist.

BM: I think it’s a capitalist system, but it is of course a different capitalist system. One should not neglect that it has roots in a Leninist or Communist system. It does have certain features that can be also interpreted as the continuation of a long NEP [Lenin’s “new economic policy” which temporarily allowed some market freedoms]. It has become de facto capitalist if you look at the numbers in terms of value added produced, number of workers employed in the private sector and so on. So there is no doubt that, purely empirically, it is a capitalist system.

MS: The NEP comparison is really interesting because it is capitalist economic policies in the service of ultimately state domination.

BM: Yes, that’s a good way of putting it. It is the use of a capitalist machine with the objective of state reinforcement and also the greater power of China.

MS: But is the main difference between the Chinese model, political capitalism, and what you call liberal capitalism and in particular the US, that in the west the state is really subordinate to the interests of capitalism and capitalists?

BM: It’s not the popular way to put it but I would agree with that. What we call democracy implies approximately the same opportunity for everyone to influence government policies. But we know that the ability to influence government policy is pretty much a function of your income level. It is to a large extent representing the views of the wealthy.

MS: Between these two models, which do you see as having the greatest prospect for further success, or conversely which is most fragile and what does that mean for the competition between them?

BM: Let me start with the negative side. If you go back to 1989, the presumption was that liberal capitalism had won and everybody was going to eventually move to that system.

I think about modernisation theory, which says that as the middle class becomes larger, it would like to have a greater say in the policy decisions, so eventually democratisation will take place. South Korea and Taiwan are very good examples of this having happened. 

Now we’re much less confident that we have charted the way to the future and that we know how the future would look. If the Chinese model becomes exported elsewhere, and we do see some signs of that, it could become fairly powerful in the sense that it is not at all like a socialist model. 

Because it allows large private ownership, it is much more economically successful. Many of people’s daily functions are not constrained in the way that they were in the Soviet Union. It is the model where you are open to the world but certain areas are controlled by the state.

I’m to some extent growth-determinist, you could call it, or economy-determinist: I believe if that model consistently keeps on delivering high growth rates or higher growth rates than the liberal capitalism its attractiveness would increase.

You can argue that governments permanently under pressure to deliver economic growth because they fundamentally lack legitimacy from elections could eventually, like a runner that runs all the time gets in better shape, actually become better at delivering that.

I even see Covid as a reflection of that. The political pressure on western governments to basically protect human life was not as strong as in China because Chinese legitimacy of the government depends to a large extent, I think, on how well they handled Covid.

MS: It seems to me that we are seeing a big swing back to an active state in western countries. We have Bidenomics, we have the change in analysis and rhetoric at the IMF and other international institutions. We see a revalorisation of the social market economy in Europe. 

Does that mean western countries are rediscovering social democracy or does it mean that they are being influenced and attracted by something like China’s political capitalism?

BM: As you know, the death of the state was much exaggerated in the west because, despite the Thatcher and Reagan revolutions, state expenditures were practically unchanged.

But of course the state lost in the sense that the regulatory framework was gradually dismantled. Now the state, I agree with you, is back but I don’t think that the state in the west is back because of China. I think the state is back because there is a fatigue of the Thatcher/Reagan or neo-liberal model and I think to some extent we might see in the future Covid as a useful bookmark of the end of a period.

MS: Should we expect inequality to continue rising?

BM: If I’m right in believing that we have come to the end of an era, then I really don’t think that inequality will continue rising. In the UK it has actually been stable for ten years. Moreover, we have seen with Covid a reduction of inequality in the US. The first data came out and, of course, there was an increase of income at the top, but there was a substantial increase in the middle class and the lower classes because of the large support programme.

MS: I wanted to ask about the issue of corruption in political capitalism. You’ve suggested that we should normalise it, that we have to accept a degree of corruption.

BM: Yes. Obviously I think that the corruption at the top is extremely dangerous because it essentially destroys the body politic.

However I don’t think that we have to put all the types of corruption in the same bag.

There are certain forms of corruption at a lower level, not at the top level . . . in western countries and the US in particular, corruption has become normalised. Lobbying is simply a corruption that has been stamped as being legally acceptable.

It’s not a popular view, but I think that by saying only zero corruption is acceptable or desirable we may be exaggerating what can be possibly done.

MS: There is this nostalgia for the postwar decades in the west. You can see it partly in support for people like Donald Trump, but partly also in this return of the state in the mainstream. Is there any way in which the current configuration of western capitalism could return to some of what it was like in the postwar decades?

BM: I don’t believe that. I think the conditions now are really different. Globalisation is there to stay. People of my age remember that there were capital controls, there were price controls, the world was not really as integrated as it is now. So to turn the clock back, I think, is not going to work. Moreover, the nature of work has changed. 

We are really no longer talking about most of the factories being run by large companies with thousands of workers, which in principle have the same objective. So I don’t know that we can turn the clock back to the social democracy of the 1960s and 70s.

MS: How does the whole green agenda play into this?

BM: I have to go back to the very beginning of our conversation, when we talked about global inequality. I’m against “degrowth” (the idea that in order to reduce carbon we have to reduce GDP) because I believe that degrowth is, even in terms of numbers, incompatible with improved welfare of many relatively poor people. People don’t realise that the median income in western countries is at the 91st percentile of the global income, so even if you were to bring everybody in the rich countries to the median, which is actually for 50 per cent of people a loss of income, you would still not solve the problem.

I don’t know, because this is not my area, whether we will be able to stop the temperature increase at one-and-a-half or two or whatever, but I believe that the only solution is really an economic solution through incentives and technological change.

Technological change doesn’t happen simply because you have a technology. It happens because somebody pays you to develop that particular technology.

MS: It’s techno-optimism, isn’t it?

BM: Yes.

MS: If you imagine that we do technologically decarbonise our economies, will that change inequality or the structure of economic production . . . will it change globalisation? 

BM: I honestly don’t know because I don’t know what the impact of different technologies will be on, let’s suppose, the rates of growth of different countries. Let me just think aloud. Look at China. About 15 years ago the concern was, is China going to be able to go into higher value-added production? Because, as you know, it was producing toys and the question was actually, are they going to be able to produce things of high added value?

What China did was basically leapfrog because it went, rightly, for the top technologies because it had human capital that would allow that, including green technologies. So you can possibly argue that countries that are actually not very rich but do have human capital may be able to benefit from that kind of a technological revolution.

This is really thinking aloud. To some extent they may be helped by another development that we all know, the ability to work remotely. For example, if you’re a very clever guy in Nigeria and you’re actually able to work remotely with people in the US and elsewhere, that of course might also then be used to leapfrog technological developments in Nigeria. You might learn quite a lot of stuff by working remotely and then you create your own company in Nigeria to do that.

MS: That’s really interesting because it links to what’s going to be my final question. There are many people who worry or who think that globalisation will be rolled back.

BM: I think globalisation is grounded in two forces which, in my opinion, will be very difficult to roll back. One of them is self-interest, because people are making more money by being globalised. Second is the conjunction with technology, as technology has of course enabled us to talk now (in this interview) and enabled the control of production remotely, so basically you move your factory elsewhere physically but you control these workers.

I think the forces of self-interest and of technology cannot be undone. Can this genie be put back in the bottle? Yes, it’s possible to actually retard the development of globalisation. You have trade wars, you have increases in tariffs, as we have seen, you can see a national security issue with transfers of money. You can see greater protection of intellectual property rights.

So, yes, all of that would slow down globalisation but short of a major nuclear war I honestly do not see the forces that would be sufficiently strong to go against self-interest and against the existing technology. That’s why at bottom I’m actually optimistic that globalisation cannot be undone.

Since this conversation took place before Russia’s invasion of Ukraine, Milanovic later added these reflections:

BM: How do these events affect what I said regarding globalisation? While the effects of trade and investment sanctions on the Russian economy will be, I believe, lasting and strong, the existence of such sanctions — however contraindicative to the spirit of globalisation — does not imply a significant retreat of globalisation. Many countries (Iran, Venezuela, Cuba, North Korea, Burma, etc) are under Western sanctions; thus adding Russia to the list does not change things materially. Nor does it make it impossible for Russia to substitute Western markets with those in Asia and Africa, and thus to maintain approximately the same involvement with the global economy.

Financial sanctions, however, may have more of a negative effect on globalisation, by leading major countries to reassess their reliance on Western (principally, American) financial assets. If so, current financial sanctions may cause the fragmentation of the global financial market.

The above transcript has been edited for brevity and clarity

This article has been amended to clarify that Lenin not Stalin introduced the New Economic Policy