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Globalization: Who is the loser?

January 20, 2021

reading time: 8 minutes

by Thomas Weibel, guest author

elephant chart

The "elephant chart" shows the impact of globalization on incomes: The very rich and the very poor benefit, the middle class loses. Is this true?

The 30-page report written by Serbian-American economist Branko Milanovic for the World Bank in 2012 contained explosive information. Milanovic had studied global income trends between 1988 and 2008, a period also referred to as the third phase of globalization. Page 13 contains a graph that shows the percentage of global income distribution on the X axis – ranging from the poorest at 5 percent to the richest at 100 percent – while the Y axis indicates real income growth measured in so-called “international dollars”, a benchmark currency used by the World Bank. The curve rises sharply for the poorest quarter of the global population, stagnates at a high level until the richest third, then drops to zero or even below zero for three quarters, and only rises sharply again for the highest one percent of all incomes.

elephant chart
Like an elephant with a raised trunk: The elephant chart.

In other words: the large number of poor people in the world, the middle class in emerging markets, especially in East Asia, and the small number of people who account for the world’s very richest individuals benefited massively from globalization; the middle class in wealthy countries, on the other hand, saw zero growth at best, if not a loss of prosperity. “These people, who may be called a global upper-middle class,“ Milanovic wrote by way of explanation, “include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated.”

An explanation for Trump and Brexit?

According to the chart, it is therefore not the world’s poor, but actually the affluent middle class that have lost out when it comes to globalization. This finding defied people’s expectations. And because the chart resembled an elephant with a raised trunk, it was quickly dubbed the “elephant chart”. “The most important chart of the last decade,” as it was sometimes called, was used to explain a range of political developments: the rise of populist movements in Western and Eastern Europe, Brexit and Donald Trump’s election as president of the US.

In 2016, however, the validity of the elephant chart was challenged by analyst Adam Corlett and the British Resolution Foundation. The problem? Milanovic had not taken into account the disproportionate population growth in developing and emerging countries. In recent decades, populations is those nations grew more rapidly than in wealthy industrialized countries. The percentage of poorer people in the world’s population therefore increased, pushing the global statistics lower.

This also means that incomes that were in the 70 percent range at the outset moved steadily upwards in the following decades, reaching the 75 percent range by the end of the period. Strictly speaking, the study therefore compared apples and oranges, i.e. the incomes of unequally wealthy people, and thus underestimated overall income growth.

The rich benefit from globalization but are dealt a blow by the financial crisis

But this does not change the basic curve of the graph, on the contrary: even with Corlett’s adjusted calculation, its shape (with a little imagination) remains that of a large animal with a trunk. Instead of an elephant, however, it looks more like a mammoth. Higher income growth is evident across all income levels; the middle class in rich Western countries, or in other words, globalization’s supposed losers, record increases of 5 to 20 percent. For the very richest segment of the population in many countries of the world, Corlett’s model also found that they benefited disproportionately from globalization.

Milanovic Elephant chart
The Serbian-American economist Branko Milanovic has investigated the elephant chart. © Getty Images, Roberto Ricciuti

Considering the fact that globalization’s heyday has long passed, this leaves us with the question of how things have developed in the meantime. Milanovic most recently updated his graph in July 2020. The result? Between 2008 and 2013, the highest incomes no longer formed a raised elephant’s trunk; on the contrary, during those six years, the poorer half of the global population recorded significant gains, and the incomes of those in the middle actually rose by more than half. This time, the losers were actually the world’s rich, whose real incomes more or less stagnated.

However, this is no longer attributable to the consequences of globalization, but to the financial crisis that erupted in 2008. Milanovic writes that the global recession hit rich countries much harder than emerging Asia, for example. The strong growth in China and India in particular decreased the inequality of distribution: “This was one of the major effects of the global financial crisis: it arrested the exceptionally fast income growth of the richest people in the world.”

Milanovic can only speculate as to how the shock of the coronavirus pandemic will affect global incomes in the future. But for him, one thing is clear: “What is clear already now is that the world has suffered a very strong shock and that the effects on the global income distribution are likely be felt for a long time even if we cannot yet measure them.”

This article was first published on the LGT Finanzblog, which will be terminated.

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