Global Inequality

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

Branko Milanovic is a Serbian-American economist specializing in economic development and inequality. His global perspective on inequality goes beyond the familiar idea that gaps in wealth and income always seem to be widening. There is some truth to that, but it is far from the whole truth.

Who is gaining from globalization?

Economists are in a much better position to talk about global income now that they have some decent global data. Milanovic’s data come from “more than 600 household surveys covering about 120 countries and more than 90 percent of the world’s population over the period 1988-2011.”

He uses the data to construct a remarkable chart, in which he plots percentiles of income on the horizontal axis and cumulative percentage growth in income on the vertical axis. The chart then shows which percentiles from poorest to richest have benefited the most in this period of globalization. The poorest people on earth, such as most Africans, have seen almost no improvement. However, the people in the middle of the distribution, from the 20th to the 70th percentiles, have experienced over 40% growth in income.

Who are these people? They are not the middle class in rich countries like the United States; they would be above the 70th percentile. They are the emerging middle class in rapidly developing countries. Ninety percent of them live in Asia, especially China, India, Thailand, Vietnam and Indonesia. They are not yet as rich as our middle class, but they are moving rapidly in that direction. In about three decades, the Chinese are expected to be as rich as citizens of the average European Union country.

Above the 70th percentile of global income, the recent gains in income rapidly fall off, reaching zero for people at the 80th percentile! (Remember that means zero gain, not zero income.) Who are they? They are mostly the lower middle classes within the richest countries, people who have been relatively well off historically but are not currently gaining from globalization. Think of the less-educated American blue-collar workers who are now in competition with foreign labor and haven’t seen wage gains in decades.

Above the 90th percentile of global income, income gains rapidly rise again, with a gain of over 60% at the top of the distribution. This group is the global 1%, the richest people on earth. Half of them are in the United States, and the other half are mostly from Europe and Japan. Together they receive 29% of the world’s entire income and control 46% of its wealth. They include the world’s billionaires, 1,426 individuals who together own twice as much as all the people of Africa.

For those of us who would welcome a reduction in economic inequality, globalization brings good news as well as bad news. The good news is some decline in inequality among countries, as the benefits of economic development spread to the developing world, especially Asia. The bad news is twofold. In the world as a whole, some countries remain stuck in poverty. And within the most developed countries, the benefits of globalization are going almost entirely to the upper class, at least so far.

Historical trends in inequality

Now let’s put these recent trends in historical perspective. How much of this is new, and how much of it have we seen before? The answer depends on which aspect of inequality we consider.

Milanovic makes a simple but important logical distinction: “Global inequality, that is, income inequality among the citizens of the world, can be formally considered as the sum of all national inequalities plus the sum of all gaps in mean incomes among countries.” This is just standard statistical logic: Whenever a population is divided into subgroups, the total variation within the population is the sum of the between-group variance and the within-group variance. In this case, the subgroups are countries. Milanovic refers to the between-country differences as “location-based inequality” and the within-country differences as “class-based inequality.”

The two kinds of inequality have developed differently in different historical periods:

  1. In the early 1800s, only about 20% of the total inequality in the world was due to location; far more was due to class differences within countries. But over the course of the century, as the industrial economy took shape, location-based inequality increased because the countries that industrialized first became much richer than the rest of the world. At the same time, the class divide within the industrializing countries got worse.
  2. From about the 1920s to the 1970s, country differences in income reached a peak, accounting for about 70% of all global inequality. However, class differences diminished as the middle class grew within the richer countries. The world seemed divided into largely prosperous Americans and Europeans and mostly poor Africans, Asians and Latin Americans.
  3. In the most recent period so far, globalization has reversed both twentieth-century trends. Country differences have started to decline, because growth has accelerated in Asia while decelerating in Europe and North America. But at the same time, internal inequality has increased in many rich countries, especially the US, UK and Italy. The middle class has been shrinking and the rich have been getting richer.

To put it simply, the recent decline in inequality among countries is new in the industrial era. The recent increase in inequality within wealthy countries is not quite as new, but it’s a return to something last seen in the nineteenth and early twentieth centuries.

Next we will turn to Milanovic’s attempt to make sense out of these developments and anticipate where the two components of global inequality may go next.

Continued

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