The question of who has won and who has lost because of globalisation has preoccupied economists for two decades. Now, with the help of a new data set compiled by the World Bank, we can begin to answer this vital question. Branko Milanovic explains how globalisation has changed global income dynamics.
It is generally thought that two groups are the big winners of the past two decades of globalisation: the very rich (those at the top of national and global income distributions) and the middle classes of emerging market economies, especially in China, India, Indonesia and Brazil.
Until now, there was no single source by which these insights could be checked, confirmed, qualified or rejected. However, thanks to a database of household surveys put together by the World Bank, we can actually find out for the first time, from a single and consistent data source, who the real winners and losers of globalisation are. These results give us a much more nuanced picture of the effects of the recent two decades of globalisation. Who gained and who lost? Specifically, which parts of the global income distribution registered the largest gains between 1988 and 2008?
As the accompanying chart shows, most significant increases in per capita income are indeed found among the very top of the global income distribution and among the emerging global middle class, which includes more than a third of the world’s population.
The top 1 per cent of the global income distribution has seen its real income (adjusted for inflation) rise by more than 60 per cent over those two decades. What is far less known is that an even greater increase in incomes was realised by those parts of the global income distribution that now lie around the median. They achieved an 80 per cent real increase in incomes. It is there — between the 50th and 60th percentile of global income distribution, which in 2008 included people with annual after-tax per capita incomes between 1,200 and 1,800 international dollars — that we find some 200 million Chinese and 90 million Indians, as well as about 30 million each in Indonesia, Brazil, Egypt and Mexico. These 400 million people are among the biggest gainers in the global income distribution.
The real surprise is that those in the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40 per cent and almost 70 per cent. (The only exception is the poorest 5 per cent of the population, whose real incomes have remained about the same.) It is precisely this income increase in the bottom of the global pyramid that has allowed the proportion of what the World Bank calls the absolute poor (people whose per capita income is less than 1.25 PPP dollars per day) to decrease from 44 per cent to 23 per cent over approximately the same 20 years.
But the biggest losers of globalisation — or at least the “non-winners” (other than the very poorest 5 per cent) — were those between the 75th and 90th percentile of the global income distribution. Their real income gains were essentially nil. These people represent what can be called a global upper-middle class. Their ranks include the citizens of rich countries with stagnant real incomes as well as many people from former Communist countries and Latin America.
How has global income distribution changed? From the fall of the Berlin Wall to the global financial crisis, global income distribution has changed in some remarkable ways in just two decades. We have probably witnessed the most profound global reshuffling of people’s economic positions since the Industrial Revolution. Broadly speaking, the most significant consequences of this reshuffling are:
The bottom third, with the exception of the very poorest, became significantly better-off, and many people there escaped absolute poverty.
The middle third (or more) became much richer, seeing its incomes rise, in real terms, by approximately 3 per cent per capita annually.
To which countries and income groups do the winners belong? Consider the people in the median of their national income distributions in 1988 and 2008. In 1988, a person with a median income in China was richer than only 10 per cent of world population. Twenty years later, a person at that same position within China’s income distribution was richer than one-half the world’s population. Thus, he or she leapfrogged over approximately 40 per cent of people in the world. For India, the improvement was more modest, but still remarkable. A person with a median income went from being at the 10th percentile globally to the 27th, while a person at the same income position in Indonesia went from the 25th to 39th global percentile.
The most interesting development, though, happened among the top quartile. While the top 1 per cent, and somewhat less so the top 5 per cent, gained significantly, the next 20 per cent in the global income distribution either gained very little or faced stagnant real incomes. This created polarisation among the richest quartile of the world’s population, allowing the top 1 per cent to pull ahead of the other rich. It also reaffirmed — both in fact and, even more so, in public perception — the top 1 per cent’s preponderant role as winners of globalisation.
Who are the global top 1 per cent? The global top 1 per cent are those with per capita after-tax incomes above 50,000 international dollars annually. Yet despite its name, it is a much less “exclusive” club than, say, the top 1 per cent in the United States. The former consists of more than 60 million people, the latter of just three million.
Thus, among the global top 1 per cent, we find the richest 12 per cent of Americans — more than 30 million people — and between 3 per cent and 6 per cent of the richest British, Japanese, German and French. It is a “club” still overwhelmingly composed of the “old rich” world of Western Europe, North America and Japan. The richest 1 per cent of the embattled eurozone countries of Italy, Spain, Portugal and Greece are all part of the global top 1 percentile. However, the richest 1 per cent of Brazilians, Russians and South Africans now belong there, too.
To which countries and income groups do the winners belong? Consider the people in the median of their national income distributions in 1988 and 2008. In 1988, a person with a median income in China was richer than only 10 per cent of world population. Twenty years later, a person at that same position within China’s income distribution was richer than one-half the world’s population. Thus, he or she leapfrogged over approximately 40 per cent of people in the world. For India, the improvement was more modest, but still remarkable. A person with a median income went from being at the 10th percentile globally to the 27th, while a person at the same income position in Indonesia went from the 25th to 39th global percentile. An average person in Brazilgained, too. He or she went from being around the 40th percentile of global income distribution to about the 66th. The position of large European countries and the United States remained about the same, with median income recipients there in the 80s and 90s of global percentiles.
But if the economic crisis that currently affects these countries persists, we should not be surprised to find the median individual in the “rich world” becoming globally poorer. So who lost between 1988 and 2008? In a nutshell, the losers from the past 20 years of globalisation are mostly people in Africa, some in Latin America and the former Communist countries. The average Kenyan went down from the 22nd to the 12th percentile in the global income distribution, and the average Nigerian fell from the 16th to 13th percentile.
A different way to see this is to look at how far behind the global median was an average African in 1988 and twenty years later. In 1988, an African with a median income of the continent had an income equal to two-thirds of the global median. By 2008, that proportion had declined to less than one-half. The relative declines of Africa and Eastern Europe and the former Soviet Union confirm the failure of these two parts of the world to adjust well to globalisation, at least up to the early years of the 21st century. Their more recent improved performance is still too fragile to have been reflected in the data.
The bottom line is that these results show a remarkable change in the underlying global income distribution. We now live in a world with a bulge around the median, with significantly rising incomes for the entire second third of global income distribution. That is the new “aspiring” global middle class. We also see growing wealth and (probably) power of those at the very top and, remarkably, stagnant incomes for both the very poorest and the people just below the “enchanted” richest 1 per cent or 5 per cent.
It is the latter’s income stagnation that fuels so much of the discontent in the “rich” world. They see their status decline, both with regard to the top and their brethren in the global middle class. Such discontent can quickly turn into politically potentially explosive resentment. For their part, if emerging market economies continue to post similar growth rates over the next 20 years, we might see the bulge in the figure move rightward. In that case, people from those countries would enter the ranks of the global upper middle class. And many of them would make it to the top 1 per cent to 5 per cent globally.
A Note on the World Bank Data Set
The new data set represents a compilation of household surveys from more than 120 countries for six benchmark years — 1988, 1993, 1998, 2002, 2005 and, most recently, 2008.
Household surveys are nationally based random surveys of people’s income or consumption. It is from such surveys, for example, that we obtain the oft-cited data that show the extraordinary income gains of the richest 1 per cent of Americans.
When household surveys are conducted in a sufficient number of countries, they can be combined to produce a true depiction of global income distribution. Of course, for them to be comparable also requires adjusting incomes that are reported in national currencies.
This adjustment can be done in two ways: either by converting incomes into U.S. dollars using market exchange rates, or by converting them into so-called dollars of equal purchasing parity (PPP dollars).
The latter approach is better because PPP dollars take into account the average price level in the country where the survey is conducted (for example, prices in Norway are higher than in India). Thus, with a PPP dollar, one can purchase the same amount of goods and services in any part of the world.
This crucial step enables us to transform incomes or consumption expressed in national currencies into a single “global” currency. On that basis, we can measure the economic situation of people regardless of where they live.