Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press.

Chapter 4

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 1 | Chapter 2 | Chapter 3 | Chapter 5

Chapter 4: The Interaction of Capitalism and Globalization

This chapter begins with discussions of the mobilization of labor and capital under the conditions of globalization, and how cross-border movements of labor and capital have equilibrating effects on per capita income among nations. Labor mobility is motivated by what Milanovic refers to as citizenship premiums and penalties. Capital mobility is reflected through global value chains that accelerate the growth of poorer countries by separating production from the management and control of that production. The author continues by explaining how the welfare state is affected by globalization mainly through the movement of labor and capital. He ends the chapter with a discussion of how worldwide corruption is linked to globalization as a return to political power.

Labor: Migration - Definition of the Citizenship Premium or Rent

The citizenship premium or penalty is the difference in income between people who are equally educated, motivated, and make the same effort but are citizens of different countries. The citizenship premium is rent in that it is unnecessary to bring forth production. It exist because of the control of access to a given geographic portion of the world by its current residents. It is somewhat similar to land or natural resource rent, but even more similar to monopoly rent. "In an economic sense, citizenship is a joint monopoly exercised by a group of people who share a given legal or political characteristic that gives rise to the citizenship rent."

Labor: Migration - Citizenship as an Economic Asset

Theoretically, citizenship rent can be converted into an asset by discounting likely future differences between the incomes of citizens in other countries. Two additional issues are whether the asset of citizenship can be purchased, and the different categories of citizenship. For example, in Canada and the United Kingdom citizenship can be purchased by making a substantial private investment. It is estimated that about one-third of wealthy individuals (about 10 million people worldwide) have dual citizenship. There are also cases of sub-citizenship like those in the U.S. who hold green cards. This shows that the rigid system of citizenship can be made more flexible to respond to labor needs.

Labor: Migration - Free Movement of the Factors of Production

The attitudes of rich and poor countries towards the free movement of the factors of production are currently the opposite of what they were in the past. Today rich countries that were indifferent or in favor of migration are now wary of migration. Poor countries that used to be wary of foreign capital are now seeking foreign capital. From an economic perspective the mobility of each factor of production is beneficial because each factor will tend to flow to where its returns are the highest. This implies that the factor that moves would be better off in its new location and that total output would be greater with mobility than without it. However, the movement of the factors of production could lead to disrupt, displace or make capital and labor worse off in the original location.

Migration is the movement of labor when globalization takes place in conditions of uneven mean incomes between countries. Opposition to migration implies that globalization should be reversed, i.e., that countries should erect barriers to the movement of both capital and labor. The problem with this view is that barriers to the free movement of capital and labor would lead to a reduction in global incomes. It seems that the best policy would be the free movement of people from country to country, but there is another problem. The movement of labor from one country to another can disrupt cultural norms, language, behavior and the values of the native population, and lead to dissatisfaction, and social conflict. Rather than leading to higher incomes for all, the large scale mixing of people from different cultures could produce conflicts that make everyone worse off.

Labor : Migration - Reconciling Concerns of Natives with Desires of Migrants

Milanovic proposes a flexible approach to migration based on the fact that many people view migration as culturally disruptive. It reflects a negative relationship between the native population's willingness to accept migrants and the extension of migrants' rights. The idea is illustrated in the graphic below showing a demand curve for migrants where migrant rights appear on the vertical axis and the flow of migration appears on the horizontal axis. The demand (level of acceptable migrant flow) is less when the rights of migrants are greater. Point A represents where migrants are given the same rights and duties as citizens when they arrive. Point B represents where migrants are given very few rights. At point A natives would tend to accept very few migrants. At point B the natives would tend to accept more migrants than in the previous case. The down sloping curve between points A and B could take different shapes but it establishes the negative slope and shows that the approach is flexible in that each country could establish an acceptable point on the demand curve for migration flow.

The disadvantage of the approach outlined above is the creation of an underclass, and perhaps the development of local ghettoes, high crime and a general feeling of alienation from the native population. Another approach would be to provide greater aid by the rich countries to the poor countries to reduce migration.

Capital: Global Value Chains

The global value chain or supply chain (i.e., organizing production in a way where different stages of production are located in different countries) is perhaps the most important innovation of globalization. It makes it possible to control production effectively from distant locations and includes global respect for property rights. Property rights are protected by the International Monetary Fund, the Mulrilateral Investment Guarantee Agency, hundreds of bilateral investment treaties, and other governance bodies. Poor countries that had previously been caught in a poverty trap because their capital-labor ratios were inefficient, can now develop by becoming part of Western supply chains. Today, because of these global supply chains, the control and coordination of production can be done in one location while the actual production is performed in a distant location.

Delocalized production has some important implications. First the institutions, infrastructure and politics in the recipient country become important to the center or mother company. Second, the technological progress in the offshore locations becomes important to insure that the best technology is used as an integral part of the center's supply chain.

These developments cause the nation where the mother company is located to attempt to prevent the company from transferring its best technology to the periphery. In addition, domestic jobs are lost in the rich mother countries and this promotes attempts to roll back globalization. China, India, Indonesia, Thailand and South Korea are trailblazers in this new road to development that leapfrogs over previous technological and institutional stages by allowing these countries to become an integral part of the Northern economy. This new linkage has allowed Asia to move from absolute poverty to middle-income status in a very short amount of time. It is also the origin of capitalism's spread to the rest of the world, and its universal dominance.

The Welfare State: Survival

Citizenship rent is derived from three economic advantages of citizenship:

1. Greater economic opportunities (higher wages, better jobs).

2. A claim over a stream of valuable social benefits, and

3. nonfinancial rights linked to existing institutions (e.g., the right to a fair trial, and nondiscrimination).

Advantages 1 and 3 are not new, but advantage 2 is a modern construct where economic benefits to citizens are derived from the welfare state. However, there is a conflict between the welfare state and the free movement of labor in a globalized world. This means that in the long run the welfare state is not compatible with full-scale globalization that includes the free movement of labor. Large differences among nations in all three of the advantages of citizenship have produced high citizenship premiums or penalties and caused more restrictive policies related to the free movement of labor.

For globalization of labor to become less of a political issue, the citizenship benefits of poor countries need to catch up to rich countries, or the existing welfare state in rich countries must be reduced or dismantled, or migrants must be granted considerably fewer rights than natives.

Milanovic ends this section with a philosophic problem related to migration. While inequality within a nation is viewed as a problem, global inequality of opportunity is not generally considered a problem at all, and certainly not a problem that needs a solution. However, global inequality of opportunity is an issue that needs more attention.

Worldwide Corruption

Measuring corruption on a global basis is difficult. There is a Transparency International Corruption Perception Index and the World Bank's Worldwide Governance Indicator, but they measure the perception of corruption rather than actual corruption. A different  approach involves estimating the amount of funds held in tax havens since the origin of this money is corrupt, or it was placed in a tax haven to evade taxes. Another way to access corruption is to examine the global net errors and omissions in each country's balance of payments. Part of this represents actual errors and part capital flight that may be related to domestic corrupt activities. Another approach is to quantify a proxy for wealth acquired through political connections. It involves determining the class of billionaires whose wealth was obtained from natural resources, privatizations, or other connections to the government. Although there is no direct way to measure corruption, this measurement shows that the percentage of billionaires that owe their wealth to political connections is increasing in all regions, particularly in Eastern Europe, Russia, and Central Asia.

Worldwide Corruption - Three Grounds for Corruption in the Age of Globalization

There are three theoretical reasons to believe that worldwide corruption is greater now than it was twenty or thirty years ago:

1. Hypercommercialized and globalized capitalism,

2. Open capital accounts that allow for the movement of money between jurisdictions, and

 3. The demonstration effect of globalization where people with middle-class incomes in poor countries believe they deserve a level of income they can attain only by engaging in corruption.

The first reason for believing there has been an increase in corruption involves the underlying ideology of globalized capitalism that justifies money-making of any kind. This has created a global society of fundamental amorality.

Before the spread of globalization communist countries were isolated from the rest of the world, and money transactions in those countries occurred between state-owned enterprises. The money involved was often just in accounting units and there was very little chance that it could end up illicitly in the hands of individuals. In a nonintegrated world, corruption was limited by the system. However, globalized capitalism created opportunities for corruption for those who had previously been excluded.

The second reason involves the enablers of worldwide corruption such as banks that specialize in high-net-worth individuals, and legal offices that facilitate transfers of illegally acquired money. These financial centers have provided a safe haven for all stolen assets where money can be internationally laundered.

The third reason for increased corruption is the demonstration effect, or the idea of keeping up with the Joneses. Corruption is viewed by many as a way to acquire income that is owed to those who are born with a citizenship penalty. Corruption, like migration is another way to convert one's citizenship penalty into a premium.

Worldwide Corruption - Why Almost Nothing Will be Done to Control Corruption

In hypercommercialized global capitalism, incentives for corruption are systemic and there is no way to change this without changing the system.

However, there are lots of things that could be done about the enablers of corruption like cracking done on tax havens to prevent tax evasion. But policies in rich countries that are directed to bankers, lawyers, and real estate agents and developers that make money off corrupt foreigners is more difficult. The problem is similar to the situations related to drugs and prostitution. Because it is politically much more difficult, attempts to reduce these problems target the supply side only. They are not directed against the demand side, i.e., the beneficiaries of corruption in rich countries, the consumers of drugs in Europe and the U.S., or the users of sex worker's services.

Looking at corruption from the demonstration effect perspective, we can expect self-justificatory corruption to increase. This is because income differences among countries will persist while collaborations between people from different countries who are paid different amounts for the same job will become more common. The current globalized system makes corruption inevitable.

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Go to the next Chapter.  Chapter 5: The Future of Global Capitalism

Related summaries:

Buchanan, M. 2002. Wealth happens. Harvard Business Review (April): 49-54. (Buchanan describes a universal law of wealth based on a network effect that appears to have some important implications for economic policy). (Note).

Graham, J. L. and N. M. Lam. 2003. The Chinese negotiation. Harvard Business Review (October): 82-91. (How to deal with China. Understand the cultural context of Chinese business style). (Summary).

Ignatius, A. 2021. "Americans don't know how capitalist China is." Harvard Business Review (May/June): 61-63. (Summary).

Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).

Mitter, R. and E. Johnson. 2021. What the West gets wrong about China: The fundamental misconceptions. Harvard Business Review (May/June): 42-48. (Summary).

Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).

Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).

Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).

Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).

Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Summary).