What happened in the EU is not different from what happened globally: a rebalancing between states, and an imbalance within states (at least those that once had higher per capita incomes). After all, the role of the “Baltic tigers” or of countries with low labor costs and low income and company taxation (Romania, Bulgaria, etc., where a large number of companies previously located in Germany, Italy, and elsewhere have relocated) is not very different from what has occurred to the West with Asian countries.
As an Italian, this convergence has been a
disaster. Lithuania has caught up with Italy (in PPP terms, I think it has even surpassed it), but Calabria has fallen further behind Lombardy. Moreover, today, for example, I'm expected to share with the Baltic countries or Poland an anti-Russian sentiment that is virtually absent in Italy, yet it affects our everyday lives. On what grounds should this convergence be considered a success? From whose perspective?
I do agree with your points. Convergence is about the changing relative positions and relative roles. So for some, it represents a downward movement. And, of corse, convergence of the East also takes place because of slow growth of the South. Finally, I agree with your point re. "political convergence". I think EU would be better off with less forced political convergence b/c some issues that matter to a group of countries get imposed on others (e.g. Russia-UKraine war and remilitarization).
The relocation of production to European states where labor costs are lower has also benefited the populations of southern Italy, who have been able to purchase goods at lower prices. Furthermore, Italy's gross domestic product has nevertheless grown. The responsibility for the widening gap between north and south in Italy lies with the policies implemented in Italy that have increasingly neglected the problem of the gap between north and south. The same I fear has happened in other European states. Let us not blame Europe for what are national.
I wonder if the picture looks the same if you take out some outliers that have a huge impact like Poland and Italy because of their size and Greece because of the handling and outcome of the debt crisis.
Insightful as always, Branko Milanovic. The convergence of mean incomes between European countries is real progress—and your decomposition of the Gini makes the driver unmistakably clear.
But your final observation points toward the harder question: within-country inequality hasn’t improved. And that, I would argue, is where the flow vs. stock distinction becomes essential.
Standard inequality measures—including the disposable income data you use—capture what has already been distributed. They tell us how inequality looks after the fact.
But inequality is not created there. It is created earlier—at the moment of the exceptional flow: the company sale, the capital gain, the large one-off compensation.
By the time these flows have turned into wealth—held in trusts, assets, or structures—they are already too entrenched to be meaningfully addressed.
Your piece shows where Europe has succeeded: reshaping flows across countries.
The next question is where it hasn’t: how exceptional flows are formed within countries.
That is where the next phase of inequality will be decided—not in the redistribution of accumulated wealth, but in the regulation of the flows that create it.
Great piece. When sifting through the data i've found there are significant differences within the club of ex-socialist EU members too. The convergence of some have been remarkable, like Poland, Lithuania or Romania, by some measures comparable to East Asia's. Meanwhile other countries got more or less stuck after the mid-2000s (or so) like Slovakia or Hungary.
What is maybe concerning for CEE is that in the case of the two most developed countries of the region, Slovenia and Czechia, their convergence (to the EU core) has gradually slowed recently.
So it's a question how far their current model can go, or will these countries get stuck on the level of approximately Spain and Italy - though tbf this is already quite impressive compared to their position in 1990 (esp. for Romania, Poland and the Baltics).
Thank you, very interesting. For me a big question then is whether this reduction in inequality between mean income per capita comes from the poor countries becoming more productive or rich countries less so? Is there an answer?
I think it is both. The East of Europe has definitely caught up, but it has caught up also b/c the South has grown very slowly or not at all (e.g. Greece, Italy). And as one of the comments ut it, a lot of it is endogeeneous, in the sense that the growth in some Central European counries was helped by relocation of factories from Germany or Italy there.
I didn't think you could linearly decompose gini coefficients into within and between like this. Is it any different if you were to just do the variance?
Is it still true that the inequality in almost any EU country is much less than the US, but the inequality across the EU is much greater than within the US?
What happened in the EU is not different from what happened globally: a rebalancing between states, and an imbalance within states (at least those that once had higher per capita incomes). After all, the role of the “Baltic tigers” or of countries with low labor costs and low income and company taxation (Romania, Bulgaria, etc., where a large number of companies previously located in Germany, Italy, and elsewhere have relocated) is not very different from what has occurred to the West with Asian countries.
As an Italian, this convergence has been a
disaster. Lithuania has caught up with Italy (in PPP terms, I think it has even surpassed it), but Calabria has fallen further behind Lombardy. Moreover, today, for example, I'm expected to share with the Baltic countries or Poland an anti-Russian sentiment that is virtually absent in Italy, yet it affects our everyday lives. On what grounds should this convergence be considered a success? From whose perspective?
I do agree with your points. Convergence is about the changing relative positions and relative roles. So for some, it represents a downward movement. And, of corse, convergence of the East also takes place because of slow growth of the South. Finally, I agree with your point re. "political convergence". I think EU would be better off with less forced political convergence b/c some issues that matter to a group of countries get imposed on others (e.g. Russia-UKraine war and remilitarization).
The relocation of production to European states where labor costs are lower has also benefited the populations of southern Italy, who have been able to purchase goods at lower prices. Furthermore, Italy's gross domestic product has nevertheless grown. The responsibility for the widening gap between north and south in Italy lies with the policies implemented in Italy that have increasingly neglected the problem of the gap between north and south. The same I fear has happened in other European states. Let us not blame Europe for what are national.
Se perdi il lavoro poi perdi anche il reddito che è quello che è accaduto.
Another very interesting piece Branko. Thank you.
I wonder if the picture looks the same if you take out some outliers that have a huge impact like Poland and Italy because of their size and Greece because of the handling and outcome of the debt crisis.
Insightful as always, Branko Milanovic. The convergence of mean incomes between European countries is real progress—and your decomposition of the Gini makes the driver unmistakably clear.
But your final observation points toward the harder question: within-country inequality hasn’t improved. And that, I would argue, is where the flow vs. stock distinction becomes essential.
Standard inequality measures—including the disposable income data you use—capture what has already been distributed. They tell us how inequality looks after the fact.
But inequality is not created there. It is created earlier—at the moment of the exceptional flow: the company sale, the capital gain, the large one-off compensation.
By the time these flows have turned into wealth—held in trusts, assets, or structures—they are already too entrenched to be meaningfully addressed.
Your piece shows where Europe has succeeded: reshaping flows across countries.
The next question is where it hasn’t: how exceptional flows are formed within countries.
That is where the next phase of inequality will be decided—not in the redistribution of accumulated wealth, but in the regulation of the flows that create it.
I explore this distinction at flowvsstock.substack.com
Great piece. When sifting through the data i've found there are significant differences within the club of ex-socialist EU members too. The convergence of some have been remarkable, like Poland, Lithuania or Romania, by some measures comparable to East Asia's. Meanwhile other countries got more or less stuck after the mid-2000s (or so) like Slovakia or Hungary.
What is maybe concerning for CEE is that in the case of the two most developed countries of the region, Slovenia and Czechia, their convergence (to the EU core) has gradually slowed recently.
So it's a question how far their current model can go, or will these countries get stuck on the level of approximately Spain and Italy - though tbf this is already quite impressive compared to their position in 1990 (esp. for Romania, Poland and the Baltics).
Thank you, very interesting. For me a big question then is whether this reduction in inequality between mean income per capita comes from the poor countries becoming more productive or rich countries less so? Is there an answer?
I think it is both. The East of Europe has definitely caught up, but it has caught up also b/c the South has grown very slowly or not at all (e.g. Greece, Italy). And as one of the comments ut it, a lot of it is endogeeneous, in the sense that the growth in some Central European counries was helped by relocation of factories from Germany or Italy there.
I didn't think you could linearly decompose gini coefficients into within and between like this. Is it any different if you were to just do the variance?
he did not cf. overlap term in the orange bars
Huh I thought 10-20 years ago it was different but thank you for clarifying!
Is it still true that the inequality in almost any EU country is much less than the US, but the inequality across the EU is much greater than within the US?
No; EU27 inequality is substantially lower than US inequality. That's the point of the blog.