The Future of Inequality│Abhijit Banerjee(MIT, Professor of Economics)

good morning uh ladies and gentlemen uh my name is Yun hang and I'm a professor at so National University and I'm very pleased and honored to have an opportunity to moderate this an invite session by Professor abijit uh banery uh Professor bannery is one of the most famous and respected Economist in the world as far as I know and uh so would not need a long introduction to be introduced used Professor benergy is currently the Ford Foundation International professor of Economics at MIT and he received his bachelor's degree at University of kataa in India and

obtained a PhD from Harvard University he also worked at Harvard and Princeton before joining at MIT his work is vest and covers a lot a wide range of topics in development economic he received numerous honors from prestigious academic societies among them the most notable honor should be Nobel Memorial prize in economic science awarded jointly to asra Dupo and Michael Kremer in 2019 for their experimental approach to elevating Global poverty they pioneered the use of randomized controlled trials so called rcts in economics to measure the effectiveness of policy actions such as Government interventions or government programs

in improving individuals lives particularly in areas like education and Healthcare Etc their research has a profound impact on economics and opened a new paradigm for Empirical research in economics today Professor benergy will talk about the future of inequality and share his intuition on this important topic he will first give us a kyot speech for about 20 minutes and then we'll have some discussion for about 30 minutes followed by Q&A session for the audience in the floor and this section will be finished with short remarking closing remarks by profet vaner Prof V please go ahead thank

you thank you very much for having me uh it's an honor to be addressing this very important event um and I'm very grateful to be invited uh my topic is the future of inequality but I don't have a crystal ball so mostly what I'll talk about is the past of inequality that's all we can really talk about because we can the only guidance we have in a sense is past plus some uh maybe some contemporary uh evidence and some Theory and so if you let me start with the past and in particular I don't want

to start with a long past I I just want to observe that we are currently in a in in many countries not all actually I'll come come to that in a really uh somewhat exceptional point in the history of inequality for a range of countries that includes uh China India Japan the United States Korea um and of course many other countries the inequality that we measure now let's say measured by the ratio of the incomes of the top 10% to the the incomes of the bottom 50% are at historical highs they are not they never

been this High since we have measured data doesn't mean that you know 600 years ago it wasn't higher but since we have had data so in many countries that data goes back to 1900 and since 1900 we have we are now at Global Heights of inequality in these countries in many countries we are more unequal now than we have been in modern memory there are um others where it's not as striking these there are a set of European countries like the UK and Italy which used to have a very large aristocratic class uh so till

about 19 till the second world war there was a lot of inequality but even in these countries the current levels are higher than it ever been since the second world war so uh we we're in a in a place which is is unprecedented in some ways we don't have a a moment in history where we measured the data and it look like this is this inevitable is this something about the nature of Economics which makes this necessary it makes this unavoidable I think if you look at uh the recent history some things seem clear one

is that there are lot while there's a lot of countries where it happens and if you look at the global income distribution because these are Big countries these are countries like India China us it the global picture looks more like these countries but the countries which are are not following this trend and those those are not necessarily European social democracies they are actually countries like Mexico Brazil Indonesia Morocco Nigeria these are countries where you don't follow this trend inequality is actually going down in these countries are flat and the and it's striking that these are

countries which historically have had very high levels of inequality and inequality has been a big social problem in these countries for a long time these are the countries where inequality has not gone up in the last uh 30 years or so that's in in a sense interesting that is precisely the countries that are famous for the inequality country like Brazil Nigeria Indonesia these are the countries where inequality is actually either stable or falling that's a that's something I I want to make something of that so I'll come back to that other fact that is uh

very sort of striking is that the timing is quite quite specific it the inequality Falls in all the countries I mentioned at the beginning till 1980 and then goes up and now some of these countries countries like China of course there is a clear uh policy shift there China becomes a market economy in 1979 or begins to become one and so you see why it's happening but in others it's it's a turnaround that actually deserves an explanation so it's it's a bottom of the of this curve of inequality is around 1980 now what happens in

1980 um one thing that happens and that's a I mean I I live in the US so it's a very maybe an overly us Centric perspective is is that Ronald Reagan becomes president of the US and Margaret thater becomes prime minister of the UK 79 this is and the first thing that immediately happens is that the the marginal tax rate the tax rate on the rich goes from in the US goes from 70% to less than 40% immediately okay that's uh that's uh was part of the rean program so I'm not is not saying that

this a there's a secret this is what was meant to happen the the second thing that happens is that there is a very clear discourse in my field in economics and I was a student in the early 1980s which is basically saying inequality is necessary for growth there this claim was being made so there was a very much uh uh political uh and of pseudo scientific perhaps argument saying inequality is don't worry about inequality inequality is the nature of things we we by not allowing inequality we have actually slowed down growth to have growth we'll

have lots of inequality I I think I want to make a distinction in that W with within that statement of between you know countries like China and North Korea now which have a economic system which very very strongly uh uh discourages inequality by controlling every economic activity and so when you open up the economic activities some inequality will be created and countries like us which were always free market economies is actually is it actually true so the claim was very much that inequality is needed um well I actually say one more thing the other thing

that happens taxes go down is that inequality because it becomes legitimate within firms firms the CEOs start paying themselves very high salaries the ratio of of the CEO salary to the salary of the lowest paid employee in large firms goes from a factor of 60 to a factor of 6,000 100 times increase in the ratio of the CEO pay to the pays of the workers so it's the lowest paid workers so that's a uh that's a number that is rather and this is not this is an consequence of an ideological move which says that it's

legitimate C CEOs deserve because they are producing so much they deserve this pay and that workers are not very useful so they can be paid less so it was a clear ideological move that had made it happen now is it actually true that inequality uh generates growth so the the of course the obvious example is what happened in us and the UK after they cut taxes and and let inequality explode well uh the reason they done it was that growth was slowing in these countries the fast growth period from about 1945 to 1972 273 stops

and the countries are worried that growth has is stalling so they cut they decide that they have to increase inequality to do that inequality goes up massively as I said growth does not growth remains exactly well it goes down and stays down um across the world you can look at the correlation between changes in inequality and changes in growth and I I have some research on this and there is no correlation there's no relationship if you look at the level of inequality and the level of growth meaning do more unequal countries grow faster the answer

is no they grow slower but that maybe that's purious but certainly there's no evidence that increasing inequality promotes growth is there a a very strong theoretical argument for the relationship of equality in growth well there is an argument which is the typical one that Ronald Reagan for example used which is the argument of or that you need incentives now you do need I don't know that I'm I'm not about to say that we don't need any incentives but the the elasticity of effort how how hard you work as a function of your the tax rate

in rich countries in among rich people is very very low and that's not surprising if you look at the recent biography of Elon Musk it says that he's obsessive he can't stop working it's not an accident these people got there because they are obsessed with working and that's what you see very much that the elasticity of now what happens when you raise tax rates is that they they stop paying taxes they move the country money to to to tax Havens so they don't pay taxes but they it's not that the tax colle ction goes down

but that I'll come back to that point at the end that but it's not because people are not working it's because they are just you know cheating the government at the bottom of the distribution in the other side of this is at the bottom of the distribution redistribution which also gets slowed by this of course if once you stop collecting taxes then you can't redistribute so redistribution goes down the the evidence suggests that if any think these have very positive effects that people you and you can see that us as a country which when it

used to be much less unequal it used to be a country which was much more socially mobile than most European countries some you can measure social mobility in many ways but there are measures by which US was twice as socially mobile as Continental Europe now it's half as socially immobile social Mobility so because poor people are unable to make investments they don't move out for example in the education of the children um you uh you also start start to see that uh the concentration of wealth Now is really so dramatic that it's having effects on

competition um the the I talked about the income shares of top 10% but a lot of this story is about the top 1% that the about the top 1,000 people in the world their income growth between 1995 and 2021 was 2 and a half to three times that of the top 1% so the top 1% are very rich the top with the top thousand people their income grew three times as much as those very rich people so the very richest people are their incomes are growing very very fast that reflects wealth concentration and these enormous

companies global companies that you all know about and these these companies are extraordinary profitable but the correlation between profitability and investment has gone down massively so it used to be that when you're profitable you invest but if there's no if you're profitable because you have a monopoly then you don't need to invest and they don't and that's what we're seeing so productivity growth uh this as a force for productivity growth this is a negative Force finally I think of course there is the political consequences of uh this growth in inequality if you look at where

did where did Trump get most of the votes it got much of his votes he got those votes from places where uh wages uh real wages growth was the lowest and that's not surprising it's exactly what you'd expect since he came on a anti-globalist platform but this means that a set of policies are Being Framed by this conversation where the victims of increasing inequality are voting for people who are then not necessarily taking who are taking po populist policies so all of this say makes me think that there is no very good argument which says

that inequality is essential for sustaining growth um why is inequality going going up well I think I I think there's um several things happening one is I told you a little while ago that the rich are getting enormously richer the very rich are getting enormously richer to the point where they can't spend the money I I did a small calculation of how long it would take to spend the money if you were buying let's say a car every month or something and you couldn't spend the money by buying a expensive car everywhere you could buy

a Ferrari every month and Elon Musk wouldn't even notice the difference uh they they cannot not spend the money that's why they are spending money on going to the going to Mars because there's no other way for them to spend the money there is not uh there is no uh consumption is just not so that's reflected on the fact that if you look at the wealth share of income how much of your income is coming from wealth then for the even for the top 1% uh increasing share of their income is coming from wealth it's

not coming from their labor it's not coming from their job it's not coming from the skills is coming from their wealth structure of global trade is another thing as inequality so in a sense these are Vicious Cycles as people get richer they can't spend the money so they get even richer as people get richer they demand higher quality Goods they demand branded goods and as they demand branded Goods the companies that control those Brands and I don't necessarily just mean Samsung I mean all the companies that are in that supply chain of Samsung but still

a smaller small set of companies are making are getting huge economies of scale they're they're getting growing extremely fast the global set of global brands are growing faster than the global economy by many times and that's uh that's reflects and those companies are becoming incredibly profitable so that's that's a and again because they're becoming profitable inequality is going up inequality is going up means the demand for the goods they produce is going up so there is a certain V cycle there what's going to change well I think right now I don't see a I think

that both the Tendencies I measure mentioned one is the fact that the rich are making so much money that they can't spend it and the second that that the structure of trade is one that favors Global Brands neither of them is about to change unless we change INE equality uh the second the second thing that's happening is AI and I think the evidence from AI is very uh tenuous because we don't really have a lot of AI but to the extent that there is evidence the sectors that were more ready for AI have had less

wage growth so the workers are losing that's not uh surprising but it's but I think that what's interesting about Ai and maybe different is that it it the set of jobs that a AI is going to take away is are going to be jobs that are middle skilled workers not the lowest skilled workers not the people who are flipping burgers in McDonald's but the middle skilled workers across the world so these are people who are among the best paid people in countries like India and they are the ones who are going to be clearly directly

in the line of losing their jobs so that's a that's a separate problem it's not the problem of the very poor getting poorer in a sense AI might actually help the very poor by making Health Access better it's the middle classes and the middle classes in the US for example who are going to get hurt and you know the accountants are going to get hurt because AI will do accounting better than them and that's that has major political consequences um the last piece of that story is that if you look at what's happening to Elite

Education uh it's getting incredibly expensive all over there's a global demand and that's a consequence of of the fear of AI the fact that if you don't have Elite skills you won't have a job and so El education everywhere the price is growing much faster than Global GDP and as a result uh only the rich can afford it there's a article in New York Times yesterday s saying that if you look at the people with the same SAT scores uh the the rich one the children of the top 1% are 2.7 times 2 .7 times

as likely to be admitted to an elite institution than the average and the bottom for the bottom bottom 20% that's 20% less than the average and so that's uh uh the from AI to uh a sort of a demand for elite school skills and from Elite skills to Elite schools and and a mechanism for exclusion what do we do I'm I'm I'm going to spend uh very little time on that maybe we can talk about that um as we go um I think first thing is we need to change the tax treatment of AI of

of investment and investment is subsidized investment in new Investments are many countries subsidize Investments Investments right now taking form AI so the substitution of AI for workers is actually tax subsidized secondly the tax subsid is actually very largely underestimated because when you a worker loses his job the state supports him that's not in any capitalist calculus and therefore the the 25% of the workers's income or 30% of the workers's income that the capitalist now he doesn't pay the worker he's been worker has been fired the state is taking care of him that 30% is also

a tax subsidy effectively so we're really creating a we have a very distorted pricing of of uh of AI second I think we have to directly take on Capital accum wealth accumulation wealth taxes and estate taxes are needed and to do that we need to think of tax Havens I think there should be a global agreement to ban tax Havens personally uh I've been saying this for 15 years it's not there's not a lot of take up but there's a little bit more interest now in in that idea um it's really essential um the we

one place where can be very useful is in identifying where in the F near future we're going to see major shocks where where will the jobs disappear if we know that we can anticipate that we can actually help people move out of of those sectors anticipate it build it in uh create retrain subsidize so I think that's that's actually going to be uh very critical from and uh while there are programs like that and the US has a what is called the trade adjustment allowance they are really not used so far people just when when

they lose their jobs they lose their jobs um and that's part of the reason for Trump support for example and let me just uh last thing I want to say is that I think and we need to redistribute in ways that are less humiliating I think the idea that unemployment is your fault is something that has to go especially if AI is the source of it and global trade is the source of it then we really can't let people blame themselves in the US um the death rates of among the white population in the last

four years have been so high that the white population for for the first time since 1919 the the life expectancy of the white population is falling and it's a consequence combination of drugs alcoholism suicide uh if we want we think that the middle classes are going to be hurt a lot and these are people with a lot of self-worth then I feel that uh we need to do something about it so I I I I realize that I didn't cheer you up a lot but maybe we can um we can talk about policy Solutions as

we go from here thank you thank you very much thank you thank you much for your uh insight and uh uh Prophet benergy told us that the global inequality is worsening uh significantly and it causes a lot of problem in worldwide so I think this is no exception uh for Korea so uh so let's talk about this inqu situation in in Korea uh before doing that uh I must uh uh confess that I'm not expert in development economics so I'm not familiar with literature but so I looked at the you seem to know a lot

actually I what you wrot well I look at the dictionary of the definition of inequality and it says that inequality refers to unequal or uh unjust uh distribution of uh resources and opportunity among members of a society right so I think this this concept has a different meaning in different context and it is not easy to measure but I think all the concepts are kind of related so I think it in any case it is bad for Society because it uh weakens the strong bonds among people also it leads to uh political polarization and restrict

uh social uh uh Mobility also it may lower uh economic growth you said they are not correlated but uh I agree that uh inequality does not boost economic growth but excessive inequality May hampen or Disturb This economic growth because you have com social conflict and as you know Korea is well known for its rapid growth economic growth and uh uh social cohesion and uh one of the sources I think of the social cohesion is that this this Society is very homogeneous very homogeneous with uh most people a single race and this uh homogeneity also uh

makes this this inequality matters a lot in in our society so in in there's famous Korean uh proverb uh saying that if uh my uh my stor curs if my cousin buys lent that means that I'm super jealous of the prosperity of other people so in that sense inequality matters a lot uh in in Korea and people care too much about others uh Behavior so thank you very much for uh raising this issue today in Korea so before we start let me give you some uh statistics on welfare statistics so in Korea income inequality and

relative poverty uh Rose substantially especially after 1997 Asian financial crisis and uh have remained persistently High uh in recent years so if you look at the geni coefficient which is a measure of inequality income inequality is like 333 it's uh it's a bit increasing and the income quantal share ratio which is a ratio of the top to the bottom 20% income is like almost six times so the bottom uh top 20% uh almosts about six times more than 20 20 bottom top 20% uh people and the relative poverty rate which is the proportion of people

with less than uh 50% of the median income is 15% so these numbers are relative very high in uh WD countries also we are experiencing a rapid uh demographic changes so uh uh because of popul aging and robor so proportion of the population over 65 is now is 17.5% which is already very high and they expected to increase to 46% in 2070 so almost half of the people in 50 50 years from now will be over 65 and total for rate is extremely low lowest in the world is like a 78 so given this situation

we are facing a substantial pressure on uh public spending for this welfare also we have another uh restriction because we have a geopolitical risk because we are facing North Korea so we have to be very cautious in increasing the public spending too much on welfare so uh given this restriction it would be very important to uh find out cost effective solutions to reduce inequality so and the strengthening social sa safety net so I would like to discuss some policies to reduce these inequality and promote social mobility in in especially in Korea because you are in

Korean okay so before I I start maybe uh I have a personal question so you are expert in development economics so how you became interested in develop economics especially in elevating uh poverty issues do any motivation well you know I'm I grew up in India i i in fact uh maybe just by accident even though my family isn't was perfectly comfortably middle class I grew up right next to one of the biggest slums literally right we were the last house my grandfather very cleverly bought a plot which turned out to be a one of the

worst Investments you could have made it was right next to a slum so it was very hard to sell the land and um as a result you know we I had lots of exposure to Poverty from day one I can't remember the time when I didn't know uh about uh deep poverty so it was and in this is in the 1960s when people in India were much poorer than now I mean we live next to in the same place for till uh very recently so we I saw the change and it was a even though

I you know there are many many things that I'm not satisfied with it's clear that the very poor have all over the world have become less poor in the last 40 years and you see that very much that everybody has clothes everybody's you know doesn't look like they're starving uh some changes have happened but it was very much that so I I don't think I had a choice at some level you know if you're an economist and you grew up with that it's hard to imagine sort of saying well no I'm going to and in

fact I'm trained as a as a economic theorist and I was even um I was I taught economic theory for many many years at places like MIT so it's not not for particularly because this was my training in fact I had no training in development economics I trained myself but in the end it was it's very hard to resist that compulsion I see I see I heard that your PA both of your parents are a professor of Economics correct and it's very depressing that professors in India doesn't make so much money yeah I'm just kidding

were not particularly we was was a we were had a in a sense we had a very um everything was very very very close to being um the margin always okay so the next question will be on old weight age poverty okay so poverty in Korea is concentrated mostly among elderly and the relative poverty rate among the eldery which has age more than 65 is about 40% is OBD average like in 133% which is very high highest in OC countries Al the Gen coefficient for the elderly group is also very high which means that there

is a lot of income inequal among the elderly population as well so I don't have any data on absolute poverty uh but it's like to be significant especially for the eldery uh living alone without family support So Korea has some multi-pillar system like a basic livelihood security program or basic pension system but so far it has been in insufficient to prevent High poty R most of it is contributory sorry most of it is still contributory from pension pension so we have a basic pension also National basic pension then there is contributory pension contri yeah it's

uh you based on your working working history oh I see the selection criteria no is is is is is most of the pension payment coming from what you accumulate accumulated during during your working life no this is different that is called uh just the national pension this basic pension is only applies to oldy it gives to about 70% of uh elderly people and uh it gives about uh three 300,000 like in two $230 us so it given almost all uh uh eldies but we also have National pension so it's depends on how much you accumulate

uh throughout your National but uh it was uh introduced relative late uh recently it started 1999 so many of the other not receed the pension so that's why the C of the poty so government is now trying to reform the pension system but has not made a big progress yet because it requires social uh consensus and one of main difficulties coming from intergenerational conflicts as you can imagine because younger Generations may have to pay pay more and receive less to sustain dispension system it is uh difficult for the uh young people because uh after the

pandemic the housing price uh increased a lot and young people cannot buy houses and so they cannot marry also they cannot uh find good regular jobs so that uh uh caused a lot of frustration among uh young people and they have they tend to have extreme self Perfection perception in Korean equal eang m that means that this life is hopeless or this life is doomed something like that so uh we have some inter generous conflict and problem with the pension system so what policy would you recommend to deal with this old age Pro uh poverty

problem and solve intergen intergenerational uh conflicts I mean I think part of the just to say the obvious is that um reason why Korea has this and China will have a has it too is because these are countries that grew fast at very fast at some point so the people who retired uh 20 years ago had a lifetime earning stream whether they saved that money or they saved in the National pension the lifetime earning stream was very low relative to the people who are uh earning now yes so fast growing countries kind of inevitably have

this problem so in a the good news there is that it as growth slows the problem sort of somewhat solves itself so it's a relative you know because then the the the inequality goes down because the the young are not much richer than the people who are reaching uh reaching pension age now had high wages for a long time yes uh whereas people who reached pension age 20 years ago had high wages never almost never had high wages so therefore I think the problem will bit solve it part of it will be solved that's that's

the good news I think just that's the demographic demographers point of view but I think there is some truth to it on the other side I would say that the I I think um again rather than turn taxing the I think taxing profits profits are growing as a share of GDP in Korea as well and wealth is growing as a share of GDP and uh uh that both of those are direct targets of Taxation so I would say that you know My Views are that you should take on wealth and profits I think that's where

the Leverage is okay thank you very much so we have other questions but we only have uh three minutes so uh well maybe best uh so about racial inequality so uh given the rapid Democratic change uh many people believe that Korea should pursue an active immigration policy yeah so we should admit High skilled immigrants for example but there are also concerns that immigrants coming from Korea may take away jobs from Koreans so also uh also Korea is moving to Multicultural uh Society it has been very homogene Society with a single race for a long time

so there is some hostility against uh uh immigrants so some uh people even suggest that differentiated minimum wagees should be provided to our foreign workers to protect welfare levels of the existing Korean workers so what would be appropriate uh policy for immigration you I I I think most countries that have actually uh you know I think the history of immigration is always this the US um you know in Boston where I live uh the Italians and the Irish white people were seen as as being you know they were described as being black people as being

uh you know immigrants from Africa the Italians were described as being they're coming from Africa there was Prejudice which then of course the Italians soon became integrated into society and then the Prejudice moved to the next group the Mexicans or something so I I I don't I the history of integration is always that there will be more fear than and then you forget that that was your fear and you start fearing something else so that's the I think one thing to say is that it's there's a long history of this this other part of it

is that I think that given how much Korea is going to age whatever you do in a sense and if if you then want to introduce child care and and have an aging Society this going to be huge demand for old age care and child care these are two jobs where you want find enough people to do them so I I I do feel that there is there is a real space and opportunity precisely because of that that we need people I mean if you look at where the the syrians are working in Germany they're

working a lot of them the women especially are working in in old age care uh Germany is also an aging economy and that's not it's not that's not crazy okay thank you much uh I have other questions but maybe I should stop here and we'll take some uh question questions from uh the floor so any questions um hello Professor Beni and Professor Hong um I'm a grad from Corel University and I'm working at LJ Corporation right now um my questions are twofold so first usually in development economics we see high inequality and very high fertility

rates but in ch in countries like China and Korea right now we see persistent inequality and extremely low fertility rates and I'm wondering how low fertility rates would would be impact acting inequality in the future in countries like Korea and my second question is we've you've mentioned um low fertility rates and simultaneously rapid population aging and do you see these two forces being inflationary or deflationary thank you I inflationary is mostly monetary policy it can I don't think these are per I think the real real issue I think the one you pointing to is um

the connection to inequality and I I think there are two directions one is that I think it's what's going to do is it's going to eventually um you'll have uh wages catching up because there's no way to workers will be scarce the second thing is the inter generational question will be critical because there'll be an aging population who who will need not just money but services and how you will how will you redistribute money towards the elderly will be a critical part of the inequality story so another question okay hello um thank you so much

for your presentation uh luchas sataya worked for the UN on violence against children I wonder what your position is regarding how the climate crisis is also affecting inequality and the future of inequality thank you I I could uh I in fact two days ago gave a one hour lecture on this I can go on and on uh it's certainly going to be I think both in terms of the employment opportunities is the world's poorest people who are going to suffer it's very clear the geography of of the climate crisis is very very clear uh the

poorest people will suffer poorest people will die uh and there is uh really right now almost no mechanisms for redistributing at a scale that will needed to even mitigate this to a significant extent so we're really facing staring into the barrel of a gun there thank you much uh given the time constraint might be I think we should stop here and uh do you have any uh final words uh to say yeah I my only thing I want to say is that while we I didn't paint a very cheering picture I do want us to

not lose hope I think we Lo lose hope we are done that's the we need to keep trying and and I think we we as Humanity have been creative we need to solve this problem we all of you many of you look very young to me you you have the responsibility of of do taking that on finding solutions for the world thank you okay thank you very much let's finish this session thank you much thank you