CityReads│Winners and Losers of Globalization

105

Winners and Losers of Globalization: the Elephant Curve

Why the Global 1% and the Asian Middle Class Have Gained the Most from Globalization?

Branko Milanovic, 2016. Global Inequality: A New Approach for the Age of Globalization, Harvard University Press.

Sources:HTTPS://HBR.ORG/2016/05/WHY-THE-GLOBAL-1-AND-THE-ASIAN-MIDDLE-CLASS-HAVE-GAINED-THE-MOST-FROM-GLOBALIZATION

Picture source:

What are the effects of globalization on incomes and their distribution in the world? The period from the mid-1980s to today has been the period of the greatest reshuffle of personal incomes since the Industrial Revolution. It’s also the first time that global inequality has declined in the past two hundred years.

In terms of income growth, who are the winners and who are the losers of globalization?

To answer the above questions, Branko Milanovic takes a different approach of looking at real incomes across the world population in joint work with Christoph Lakner in 2015 and in a recently published book, Global Inequality: A New Approach for the Age of Globalization. 

This research is based on the data from almost 600 household surveys from approximately 120 countries in the world covering more than 90% of the world population and 95% of global GDP. Since household surveys are not available for all countries annually, the data are ‘centred’ on benchmark years, at five-year intervals, starting with 1988 and ending in 2008. In addition, the book includes updated information to 2011.

The advantage of a global approach resides in its comprehensiveness and the ability to observe and analyze the effects of globalization in many parts of the world and on many parts of the global income distribution. The overall effects of globalization on the different parts of the world are different and they are interconnected with each other.

The elephant curve

The gains from globalization are not evenly distributed.

The figure below, dubbed by some ‘the elephant graph’ because of its shape – shows real income gains realized at different percentiles of the global income distribution between 1988 and 2008. Income is measured in 2005 international dollars and individuals are ranked by their real household per capita income.

The chart shows the world’s population along the horizontal axis, ranked from the poorest to the richest percentile; real income gains between 1988 and 2008 (adjusted for countries’ price levels) are shown on the vertical axis.

The results show large real income gains made by the people around the global median (point A) and by those who are part of the global top 1% (point C).  It also shows an absence of real income growth for the people around the 80-85th percentile of the global distribution (point B).

Cumulative real income growth between 1988 and 2008 at various percentiles of the global income distribution

Source: 

The “winners” were the middle and upper classes of the relatively poor Asian countries and the global top 1%. The (relative) “losers” were the people in the lower and middle parts of rich countries’ income distributions.

Nine out of ten people around the global median are from Asian countries, mostly from China and India. For example, the person at the median of the Chinese urban distribution in 1988 rose to the 63rd global percentile in 2008 and was above the 70th percentile in 2011.  She thus leapfrogged, in terms of income, some 1.5 billion individuals. Such dramatic changes in relative income positions, over a rather short time period, have not occurred since the Industrial Revolution two centuries ago.

The people around the global median are, however, still relatively poor by Western standards. This emerging ‘global middle class’ is composed of individuals with household per capita incomes of between 5 and 15 international dollars per day. To put these numbers into perspective, one should recall that the national poverty lines in rich countries are often higher than 15 dollars per person per day.  

Seven out of ten people at that point are from the ‘old rich’ OECD countries. They belong to the lower halves of their countries’ income distributions.

The expansion of incomes around the median of the global income distribution was so overwhelming that it ensured global inequality’s decline — despite the real income growth of the top 1% and rising national inequalities in many countries. Real incomes more than doubled between 1988 and 2011, a shift that involved large swaths of people (almost a third of the world population, most of them from Asia).

It is probably the first time since 1820 that global inequality is deemed to have gone down, from approximately 69 Gini points to around 64. (On the Gini scale, 100 would be complete inequality while 0 would be complete equality).

The chart can be (and was) recast in many other ways, from using market exchange rates instead of exchange rates adjusted for purchasing power parity, to calculating it over the percentiles fixed at the positions they had at the initial period (1988), but whatever adjustment one does, the essential features –the supine S shape—with the peak around the global median and the trough around the 80th -90th global percentile, remain. It is precisely the growth in the middle, fueled by the resurgent Asia, and the quasi-stagnation of incomes around the 80-90th percentile of the global income distribution where Western middle classes are, that have attracted most attention. 

Source:

In September 2016, Resolution Foundation released a report, Examining an elephant:Globalisation and the lower middle class of the rich world, digging into the data and making some critiques on the elephant curve. But the elephant shape remains, even if its dimensions are different.

Understanding the elephant

Does the growth of the Asian (or more generally global) middle class occur on the back of income stagnation of the Western middle classes? Or at least, are the two somehow related?

First, while we cannot ever fully convincingly establish causality between the two developments, the coincidence of the two developments will lead, and has led, many people to make that conclusion.

Second, there is also a plausible narrative that the roles played by imports from Asia, as well as by offshoring and foreign outsourcing, link the two developments.

Even if globalization were to be associated with an absolute real income improvement for all, or almost all, and reduced global inequality, if it is also associated with rising national inequalities, the unhappiness stemming from the latter may dominate.

The political implications of a global ‘elephant graph’ are being played out in national political spaces. In that space, rising national inequalities, despite being accompanied by lower global poverty and inequality, may turn out to be difficult to manage politically.

Related CityReads

（Click the title or enter our WeChat menu and reply number ）

CityReads ∣Notes on Cities

"CityReads", a subscription account on 

WeChat, 

posts our notes on city reads weekly. 

Please follow us by searching 

"CityReads"  

Or long press the QR code  above