For several years now, economists have remarked on the simple yet striking representation of world income growth in a chart by Branko Milanovic. The chart plots relative gain in household per capita income between 1988 and 2008 at different points of the global income distribution, showing that the gains from globalization are very unevenly distributed. Known as the “elephant chart” because it resembles an elephant with a raised trunk, the chart indicates that the lower middle classes of the rich world made the weakest relative gains during the most intense phase of globalization to date. So while those of modest means in wealthy countries may still have more to their names than even well-to-do citizens of developing nations, it’s those lower income Americans, Japanese, and Western Europeans who’ve seen their global standing degrade—this while watching their wealthiest countrymen make gains commensurate with those in economically emerging parts of the world.
In early 2015, Paul Krugman forecast that the trend depicted in Milanovic’s chart would be a “crucial factor in developments over the next few years.”
Cue xenophobia. Cue Donald Trump. Cue nationalism. Cue Brexit.
In Global Inequality: A New Approach for the Age of Globalization, Milanovic calls attention to three points of interest in the chart, essentially corresponding to the peak of the elephant’s head (A), the lowest point on the curve of its trunk (B), and the trunk’s tip (C). Point A is around the median of the global income distribution, which divides the global population in two: one half better-off, the other half worse-off than the people at the median income. Here’s Milanovic:
People at point A had the highest real income growth: some 80 percent during the twenty-year period. Growth was high, however, not just for those near the median but for a broad swath of people, ranging from those around the 40th global percentile to those around the 60th. This is, of course, one-fifth of the world population. Who are the people in this group, the obvious beneficiaries of globalization? In nine out of ten cases, they are people from the emerging Asian economies, predominantly China, but also India, Thailand, Vietnam, and Indonesia. They are not the richest people in these countries, because the rich are placed higher in the global income distribution (that is, more to the right in the graph). They are the people around the middle of the distributions in their own countries, and in the world, too.
On to point B:
The first thing to notice is that it is to the right of point A, meaning that people at point B are richer than people at point A. But we also notice that the value on the vertical axis at point B is nearly zero, indicating the absence of any growth in real income over twenty years. Who are the people in this group? They are almost all from the rich economies of the OECD (Organization for Economic Cooperation and Development). If we disregard those among them who are from the relatively recent OECD members (several Eastern European countries, Chile, and Mexico), about three-quarters of the people in this group are citizens of the “old-rich” countries of Western Europe, North America, Oceania (the three areas are sometimes represented by the acronym WENAO), and Japan. In the same way that China dominates at point A, so do the United States, Japan, and Germany dominate at point B. People at point B generally belong to the lower halves of their countries’ income distributions… For simplicity, these people may be called the “lower middle class of the rich world.” And they are certainly not the winners of globalization.
The contrast between points A and B highlights one of the key issues of the globalization process. “In short,” writes Milanovic, “the great winners have been the Asian poor and middle classes; the great losers, the lower middle classes of the rich world.”
Such a bald statement may not surprise many people today, but it would certainly have been surprising to many if it had been made in the late 1980s. Politicians in the West who pushed for greater reliance on markets in their own economies and the world after the Reagan-Thatcher revolution could hardly have expected that the much-vaunted globalization would fail to deliver palpable benefits to the majority of their citizens—that is, precisely to those whom they were trying to convince of the advantages of neoliberal policies compared with more protectionist welfare regimes.
And now to point C:
We are dealing here with the people who are globally very rich (the global top 1 percent) and whose real incomes have risen substantially between 1988 and 2008. They too are the winners of globalization, almost as much as the Asian middle classes. People who belong to the global top 1 percent are overwhelmingly from the rich economies. The United States dominates there: half of the people in the global top 1 percent are American. (This means that approximately 12 percent of Americans are part of the global top 1 percent.) The rest are almost entirely from Western Europe, Japan, and Oceania. Of the remainder, Brazil, South Africa, and Russia each contribute 1 percent of their populations. We can call those in group C the “global plutocrats.”
Comparison of groups B and C allows us to address another important cleavage. We have seen that group B, with zero or negligible gains from globalization, consists mainly of the lower middle class and the poorer segments of the rich countries’ populations. In contrast, group C, the winners of globalization, consists of the richer classes from these same countries. An obvious implication is that the income gaps between the top and bottom have widened in the rich world, and that globalization has favored those in the rich countries who were already better-off. This too is not entirely surprising, since it is generally acknowledged that within-nation inequalities in the rich world have increased during the past twenty-five to thirty years. But what is important, and rewarding in an epistemological sense, is to see that these effects are observable when we look at the world as a whole, too.
In prepping its readers to see Milanovic’s chart “over and over,” Bloomberg quoted an investment portfolio manager who remarked on our having “finally found the correct framework for thinking about intersection of politics and macroeconomic trends.” The elephant knows.
