The globalization elephant has left the room

Nearly a decade ago, the globalization elephant entered the room. At a time when advanced Western economies were still suffering from the 2008 financial crisis, a 2013 World Bank working paper included a chart that seemed to explain everything.

The map, created by researchers Christoph Lakner and Branko Milanovic, resembled an elephant. It showed growth in living standards in different parts of the global income distribution in the 20-year period of peak globalization that ended in 2008. That included the fall of the Soviet Union and China’s entry into the World Trade Organization.

The most common way to interpret the map has been to see the elephant’s tail as a representation of the world’s poor – mostly in sub-Saharan Africa, which has benefited little from trade integration. Higher up the income distribution, most of the beast has seen massive real income growth of more than 5 percent per year, largely for Chinese households and the emerging Asian middle class.

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

The middle class of the rich countries slipped on the elephant’s trunk, which did not experience any income growth. But immune to this stagnation were those in the world’s top 1 percent, represented by the tip of the torso pointing upwards. This elite was in charge of the globalized world and skimmed off the proceeds.

This interpretation of the graph was never correct because it failed to account for how people moved up and down the world income distribution over time. But it has since polluted the discourse about the effects of globalization. The good news is that Milanovic’s new study, updating his results to 2018, has taken the elephant out of the room.

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

There is no doubt that this data shows a major decrease in global inequality over the past decade. Yet again it requires careful interpretation because, as Milanovic puts it, “the greatest realignment of individual income positions since the industrial revolution” has taken place in the last 30 years. Lower-income urban Chinese households, which came close to the bottom of the global distribution in 1988, now enjoy living standards above the global median.

With China freeing up many of the slots at the lower end of the distribution, those are mostly filled by poorer Indian households who now have a lower standard of living than their Chinese counterparts.

Line chart showing annual real growth rate per capita as a percentage for 2008 to 2018, explaining that living standards have risen fastest in recent years at the lower end of the global income distribution

Further on, a rearrangement of living standards is taking place. The poorest Italian families belonged to the top 30 percent of the world income distribution in 1988, but now barely make it to the top half. Importantly, the middle class in all rich countries has not dropped in the world rankings. The top of the ranking has shown great stability, with G7 households making up about two-thirds of the global top 5 percent in both 2008 and 2018.

This new research requires us to change our thinking about globalization. With Chinese and East Asian incomes now above the world median, further improvements in average living standards will increase rather than reduce global inequality unless there are also income gains in rural India and Africa – a much more difficult question given the economic past performance of these areas .

Globalization may therefore not be nearly as successful in reducing global inequalities in the coming decades as it has been in the past 10 years. But we should be happy that the globalization elephant has left the room. The truth is it was never really there.

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