The globalization elephant has left the room

Almost a decade ago, the elephant of globalization entered the room. At a time when advanced Western economies were still reeling from the 2008 financial crisis, World Bank 2013 Worksheet It has a chart on the back to explain everything.

The graph, made by researchers Christoph Lackner and Branko Milanovic, looks like an elephant. It showed growth in living standards in different parts of the global income distribution in the 20-year period from the peak of globalization ending in 2008. This included the fall of the Soviet Union and China’s accession to the World Trade Organization.

The most common way to interpret the graph has been to view the elephant’s tail as representing the world’s poor—mostly in sub-Saharan Africa, which has enjoyed precious few benefits from trade integration. At the top of the income distribution, the main body of the beast has shown explosive real income growth of more than 5 percent annually going largely to Chinese households and the new Asian middle classes.

Line chart showing the real annual growth rate per capita as a percentage from 1988 to 2008, showing that the elephant chart appeared to explain the effects of trade integration on global income

The middle classes in rich countries were slipping down the elephant’s trunk, with no income growth whatsoever. But safe from this slump were those in the world’s top 1 percent, represented by the tip of the trunk pointing upward. This elite was in charge of the globalized world and reaped the revenues from it.

This was the interpretation of the chart Never correct Because it did not take into account how people move up and down the global income distribution over time. But it has tarnished the discourse about the effects of globalization ever since. The good news is that Milanovic New searchupdating its results to 2018, it removed the elephant from the room.

Since the 2008 financial crisis, the incomes of the poorest households have risen the fastest, with annual real income growth for the world’s poorest tenth of about 7 percent. This drops to 6 percent for middle-income households and less than 2 percent annually for the global elite.

There is no doubt that this data shows a significant decrease in global inequality over the past decade. But nevertheless it again requires careful interpretation because, says Milanovic, there has been “the largest reshuffle in per capita income positions since the Industrial Revolution,” says Milanovic. Low-income urban Chinese households, which were near the bottom of the global distribution in 1988, now have living standards above the global average.

With China vacating many slots at the bottom of the distribution, they are mostly occupied by poorer Indian families who now have lower standards of living than their Chinese counterparts.

Line chart showing the annual real growth rate per capita as a percentage for the period 2008 to 2018 showing that in recent years living standards have risen most rapidly at the bottom of the global income distribution

There is also a further adjustment in living standards. The poorest Italian families were in the top 30 percent of the world’s income distribution in 1988, but only now have they reached the top half. Most importantly, the middle classes in all rich countries have not fallen to the bottom of the rankings. The top rankings have shown great stability, with households in the G7 accounting for nearly two-thirds of the top 5 percent globally in 2008 and 2018.

This new research requires us to adjust our thinking about globalization. With China entering and East Asian incomes now above the global average, further improvements in average living standards will increase global inequality rather than reduce it unless there are also income gains in rural India and Africa – a tougher ask. Much given the previous economic performance of these regions.

Therefore, globalization may not be as successful in reducing global inequalities over the next few decades as it has been over the past ten years. But we must welcome the fact that the elephant of globalization has left the room. The truth is, there really wasn’t.

chris.giles@ft.com

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