Polity by Rob Salmond

11

The most important graph in the world

Here’s the chart that should be at the centre of every debate – in New Zealand and elsewhere – about trade and globalization:

It comes from the World Bank, and shows changes in income around the world from the fall of communism to 2008. It’s based on income surveys of around ten million households, and critically it lets us see how people at different points on the world income distribution have fared during globalization.

For me there are three things that stick out from this chart.

 

1. Globalization is really helping the developing world

The big sell on globalization was that it would lift the living standards of millions, even billions, of people in the developing world. Turns out that’s true.

The chart shows that really is happening, with the middle part of the world income distribution recording very high percentage gains in income since 1988. Each person in that group is only better off by a few hundred US dollars a year (PPP), but that money makes a massive, massive difference to their quality of life. 

2. Globalisation is really helping the world’s elite

The big knock against globalization was that is was a cash grab by the world’s elite, and the already wealthy would capture most of the gains. Turns out that’s also true.

The top 1% of the world’s income earners – with an average (PPP) income of around USD $65,000 in 2008 – pulled in over 60% income gains across the first twenty years of globalization. That’s almost as much as the top gainers in the developing world, but comes off the back of already very high incomes.

Once you do the maths on how many dollars each segment of the income distribution gained, you find that the world’s top 1% of income earners have captured 29% of all the worldwide income gains over the period, while the top 5% of income earners have captured 55% of all the gains.

Of course, the value of each dollar is very different for this group. Just as a little money goes a long way to improve the welfare of people in the developing world, even lots and lots of money doesn’t make an enormous difference to the living standards of the elite. In terms of using globalization to improve human welfare, that’s highly wasteful.

 

3. An important group, likely including many New Zealanders, is missing out

While the developing world has mainly done well and the world’s elite have dove very well, too, those people between the 70th and 90th percentile of the global income distribution haven’t done nearly as well. Many of those people are lower income earners in richer countries, along with the middle classes from the former Warsaw-pact nations.

While incomes about and below them have soared by 60% or more, some in this group have seen their incomes basically stagnate for twenty years.

Empirically, the pattern is obvious.

Politically, it was never part of globalisation’s sales pitch.

Ideologically, it is very troubling.

I completely get why it’s a good idea to embrace an economic system that helps the developing world escape extreme poverty. I support that part of globalization wholeheartedly.

But does that system necessarily have to deny the working poor in rich countries any meaningful gains, in order to deliver huge windfalls to the few percentiles even richer than them?

Given that pattern, it can’t be surprising when people from that cohort start to reject the pro-globalisation orthodoxy by supporting Brexit or Trump. They’re saying, with some justification: “why support a system that delivers more for everyone else that it delivers for me?”

* * *

It won’t surprise regular PA readers that I see a case here for more redistributive income and economic policy within the rich countries. The windfall gains to the richest of the rich are showing up as big increases in rich country inequality, and the people in those countries aren’t happy about it.

Indeed, the 2014 New Zealand Election Study shows a full 68% of New Zealanders support the government doing more to narrow the income gap, while only 17% oppose the idea. Even among National voters, narrowing the income gap attracts 50% support against only 29% opposition. Our public wants our government to act on rising inequality, and address the ugly pattern the World Bank’s chart is illustrating.

Taking the rough edge off globalization for the world’s upper middle class also protects the gains that billions in the developing world have felt from globalization. It’s insurance against the repugnant – a democratic revolt from above.

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