How globalisation reduced global inequality

Lessons from an elephant and a mopane worm

The standard story goes like this: globalisation benefited the rich and burned the poor. Evidence for this can be found, many would argue, in the global financial crisis and the Occupy Wallstreet-movement that followed, in the rise of populism from Brexit to Trump to Bolsonaro to Le Pen, and even in the increasing protests we are witnessing across the world, from Kwazulu-Natal in 2021 to Sri Lanka a few weeks ago. Globalisation has failed, they would argue, because while the rich are getting richer, the poor have seen their jobs outsourced to developing countries

To some extent, this was indeed true – for rich countries. Branko Milanovic is the economist who famously first offered empirical support that the middle class in rich countries had lost ground. In his now well-known ‘elephant-graph’, because the shape of the curve resembles that of an elephant, he showed that the benefits of economic growth between 1988 and 2008 were mostly distributed to those at the bottom and middle of the global income distribution, then flattened off substantially for those in the upper-middle class, and then shot up again for the very rich, especially the 1%. What explains this? Globalisation benefited millions of workers in China, India and other developing countries. They were in the bottom half of the global income distribution. In rich countries, however, the large lower and middle class experienced almost no growth as the manufacturing jobs they used to fill were now being outsourced to China and elsewhere. But because the lower and middle classes in America and Europe are in the top 20% of the global distribution, their lack of growth is reflected in the sharp decline in the curve around the 16th to 18th ventiles (5% intervals). By contrast, the rich in America and Europe did well, reflected in the rise (the trunk of the elephant) for those in the richest 5% globally. The rise of populism in the rich world is partly attributed to these fluctuating fortunes.

But Milanovic’s elephant graph also clearly shows that the period between 1988 and 2008, the period most famously associated with the rise of globalisation, was good for the poorest 75% of humanity and the richest 5%.

So what happened after the financial crisis in 2008, when globalisation, despite attempts from many to build walls and derail global integration, largely continued as before?

In July, I attended the European Historical Economics conference in Groningen, where Branko Milanovic was the keynote speaker. He provided an update on his elephant graph. The results were surprising, to me at least. While economic theory predicts that globalisation should improve incomes, especially for the poor, I had expected Milanovic to show that global incomes were diverging. But that was not the case: he showed that global inequality declined substantially between 2008 and 2018. Globalisation did exactly what economic theory would predict: it made us all wealthier, especially the poor.

As the second curve in the graph shows (let’s call it the mopane worm, in the tradition of naming it after animals), those at the bottom of the global income distribution (the poor who live in places like China, India and Africa) experienced rapid increases in their real incomes. This meant that many millions of people were lifted out of severe poverty. In contrast to the previous period, the rich did not benefit much. In fact, the richest 1% experienced the lowest income increase. The period between 2008 and 2018 is a remarkable period in human history when the global income distribution shrunk: the world became more equal and not more unequal as many might still believe.

This again underlines the importance of an open world in creating a better life for all. A more integrated world is one where the poorest benefit the most. Let’s not forget the lesson as countries in the rich and poor world increasingly shift towards protectionism.

*An edited version of this article was first published on News24. Photo by Jasmin Ne on Unsplash.