The Global Reshuffle of Incomes

Branko Milanovic has an article in VoxEU discussing a graph depicting worldwide income gains and losses between 1998 and 2008. If one looks at the overall graph, it shows that, worldwide, people from near the first percentile through about the 75th percentile and those above the 98th percentile have seen gains in their income during that 10 year period.

Cumulative real income growth between 1988 and 2008 at various percentiles of the global income distribution

Meanwhile, however, those between the 75th and 98th have seen a notable drop in their income. Milanovic notes that incomes in the richer, OECD countries (including the U.S.). Incomes in those countries start at about the 70th percentile. (Particularly rich and particularly egalitarian countries, such as Denmark, start at more like the 80th percentile). To be in the top 1% on this global graph, a family has to have a before-tax income of about $300,000 per year.

The people at point “A” where the graph hits its apex are almost entirely in Asia. People in India and China have seen increases in their incomes. In 1998, the median urban Chinese person was at the global median. By 2011, that person had jumped to the 70th percentile.  However, the biggest winners globally are still relatively poor by Western standards. The “global middle class,” as Milanovic puts it, would be at the poverty line in the rich OECD countries.

The good news is that something like 1/5 of the world’s population (those between the 45th and 65th percentiles) saw their income double. “It is their real income growth that has driven the first decline in global inequality since the Industrial Revolution.” The bad news is that the folks who lost ground are not likely to take such a philosophical view of matters.

Milanovic suggests that the complexity of economics makes it difficult to be certain that there is a causation between the gains of the globally poor and the losses of those who are relatively poor in the richer western countries (the folks at point “B”). However, the fact that one went up at the same time the other went down makes it a compelling narrative and easy to believe for those at point “B.” The folks at point “B” are not likely to be concerned with their relative standing in the world. Rather, their sense of well being is going to be a function of how they compare to the other people in their own countries. They see themselves losing ground and the folks at the top of the national distribution making out like bandits. They are only dimly aware of the masses outside their countries. This may explain the embrace of things like Brexit and Trump.