EconomyInterview

MIA interview with Luigi Zingales, finance professor at the University of Chicago Booth School of Business

Income inequality at a global level is shrinking. But, within each country it tends to increase. To deal with it, in developing countries such as North Macedonia, the first priority is economic growth, and not reducing inequality. Hopefully, you can get into the EU and that will make it easier for North Macedonia's economy to catch up with the rest of Europe, Luigi Zingales, finance professor at the University of Chicago Booth School of Business, told MIA.

Skopje, 28 June 2019 (MIA)

Income inequality is a global phenomenon today, becoming a growing trend in developed countries such as the U.S. What steps would you recommend to deal with the consequences of income inequality, i.e. achieve a more equal income distribution in society?

It’s important to say that income inequality within each country seems to be going up, but income inequality in the world is not going up. If you take the entire world population, there are countries that used to be poor, like China, corrupt tremendously. Income inequality at a global level is shrinking. But, within each country it tends to increase. I will distinguish between developed countries like the United States from more developing countries like North Macedonia. Some of the solutions might be different depending on where you are. The other thing that is important, at least from my perspective, is that the biggest problem is not just inequality but the fact that a big chunk of people don’t seem to be enjoying any growth.

China and the United States, in the last 30 years, experience the same increase in inequality but a lot of people are upset in the United States and very few people in China. Why? Because China grew tremendously and everybody benefited of that growth. In the United States, most of the growth is appropriated by its more powerful population and the vast majority don’t get any benefits. So, my objective is more diffused growth, so that everybody can benefit from it.

In a country like the United States, the better approach is to, first of all, fight against the concentration of power in many industries including the digital industries and probably, increase the bargaining power of workers by increasing the minimum wage, or giving more power to the union to offset the power of the companies.

Would these steps be applicable to developing countries such as North Macedonia, where income inequality is also an issue and statistics show that 22,2 percent of the population is impoverished?

In developing countries, the first priority is to try to catch up with the other countries. The way to catch up is to open up the country. I know that you are trying to get into the EU and you were blocked for many years for a silly reason, about the name. But, hopefully, you can get into and that will make it easier for North Macedonia’s economy to catch up with the rest of Europe. The first priority is economic growth, and not reducing inequality. The socialist system was very good at reducing inequality, but that was equality of misery, and that’s not what we want.

Is tax policy the main way to change income inequality in developing countries?

Certainly, fiscal maneuver can offset part of that inequality, and that’s one role of taxation. However, the first step is to give an education and a job to everybody. Because I don’t think we want to create simply a large fraction of population that lives on the dole with money transfer from the government.

We want to create a country where there are opportunities for everybody and these opportunities, in my view, are obtained in two ways. First, by leveling the playing field. I don’t know in details about North Macedonia, but in most countries what you have is that connection with the governments gives you an enormous advantage. It is one of the biggest source of wealth.

If you look at more wealthy people, how did they make their money? By inventing the new ‘Apple’ or by being connected with the government?

So, the first source of inequality is biased policy by the government. We need to have much more transparency, complete transparency of who owns what.That eliminates a lot of corruption, money laundering and tunneling. Transparency is the number one thing to level the playing field.

Could the IMF and the WB use their instruments to reduce inequality?

First of all, is that in their mission? I’m a bit nervous when institutions take on missions that are not on their call because then it’s very arbitrary. It is more in the sphere of the World Bank that they want to end poverty. Poverty and inequality are not the same thing but they are more connected.

The IMF is more about stability. I’m not so sure that their role is to fight inequality. But, many of these international organizations are at a huge disadvantage because they are made of a bunch of technocrats who speak only English. They come to a country and they need the elite of the country who speak English, who are generally the oligarchs of that country, and those can understand each other very easily.

It’s very hard for this institution to really understand what the needs of the people are and cater to those needs.

What’s your take on the Yellow Vest phenomenon in France? 

The Yellow Vest is a manifestation of a large fraction of the population that feels left behind. In France, it took the form of this revolt, in Italy it took the form of a large fraction of votes for populist parties, but these are all manifestation of deep dissatisfaction.

The combination of a system that does not deliver growth to everybody and a system that appears very unfair and corrupt really are gasoline for the populist fire. We need to be paying a lot of attention to minimize the damage of this fire.

In addressing graduates at your University, you advise them to fight against monopolies: “To fight monopolies, your power as workers, consumers and investors is not sufficient, your participation in the political process is critical. This is not a republican or democratic battle, it is an American battle. This country was born fighting monopolies.” What do you mean by insisting on political participation?

This is part of a recent advice I gave to students. In the first part of the address, I was telling them how they can have an impact on their choices of who you work for, what you work on, how you consume, how you invest. I think that a lot can be done. Many young people of America tend to be discouraged from the situation, and I say “There are opportunities.”

You need to, first, pay attention and, second, pay a price – nothing is free. But I’m aware that when a company is a monopoly, these possibilities are limited. In fact monopoly is to fight through the political process. That’s the reason why people need to first understand what the damages from monopolies are and then voice their concern in the political arena.

This is not a left or right issue, it is an issue that involves everybody, and that’s the message because all too often politics is interpreted only as partisan politics and it becomes a fight for power. There are bigger ideas here and regardless on what side of the political spectrum we end up, you have to have very present the need of some form of intervention to fight monopolies.

Violeta Gerov

Photos by Frosina Naskovikj

 

 

 

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