Over the past few decades, technology advances like the smartphone and wireless internet have significantly improved the quality of life of billions around the world. The economic development brought about by globalization led to the Gintic decline of extreme poverty in China, East and South Asia, and Latin America. Globalization was supposed to boost prosperity, as nations were becoming more economically interdependent, but it’s also led to major dislocations in labor markets, benefiting workers in low-cost developing nations while severely impacting workers in the US and other advanced economies. The promise of technological progress and globalization as drivers of growth and prosperity has been a reality for many, but it’s also created winners and losers within nations, leading to rising economic inequality.
“Across the globe, but especially in the wealthy economies of the West, the gap between the rich and the rest has widened year after year and become a chasm, spreading anxiety, stoking resentment, and roiling politics,” wrote economist Branko Milanovic in “The Great Convergence: Global Equality and Its Discontents,” a recent article in Foreign Affairs. “Globalization, the argument goes, may have enriched certain elites, but it hurt many other people, ravaging one-time industrial heartlands and making people susceptible to populist politics.”
“There is much that is true about such narratives — if you look only at each country on its own,” added Milanovic. “Zoom out beyond the level of the nation-state to the entire globe, and the picture looks different. Global inequality refers to “the income disparity between all citizens of the world at a given time, adjusted for the differences in prices between countries. … At that scale, the story of inequality in the twenty-first century is the reverse: the world is growing more equal than it has been for over 100 years.”
Inequality is commonly measured by the Gini coefficient, a statistical measure of income or wealth inequality within a group, a nation, or the whole world that was first developed over 100 hundred years ago. A Gini score of 0 means perfect equality, where all income and wealth are the same for all members of the group, while a score of 100 means maximal inequality, where a single individual has all the income and all others have none.
According to Milanovic, there have been three distinct eras of global inequality over the past 200 years.
First era: from 1820 to 1950. Global inequality was rather modest in the early part of the Industrial Revolution. The GDP of the UK, the richest country in 1820 was only five times greater than that of Nepal, the poorest country at the time. In comparison, the ratio between the nominal GDP of the US, the richest country in 2023 with a GDP of around $26 trillion, and Nepal, with a GDP of around $42 billion, is over 600. Furthermore, over 100 countries have lower GDPs than Nepal.
The global Gini score in 1820 is estimated to have been around 50. Global inequality steadily increased through the 19th century and the first half of the 20th century, reaching a global Gini score of around 60 in 1900 and around 67 in 1950. The increase in global inequality was driven by the so called Great Divergence, — the growing disparity between the growth in wealth of Western industrialized countries and Japan, compared to the economic stagnation of China, India, Africa, the Middle East, and Latin America. “This period coincided with the European conquest of most of Africa, the colonization of India and Southeast Asia, and the partial colonization of China.”
Second era: from 1950 to 2000. Global inequality was very high during this era, reaching a Gini score of close to 70 in the 1990s. In the post WWII years of the early 1950s, the US produced 40% of global output with only 6% of the world’s population, and its per capita GDP was 15 times that of China. But, while global inequality was increasing, inequality within countries was falling nearly everywhere. In the US, inequality started to fall due to the rise of the middle class and the growing number of high school and higher education graduates, while in China inequality fell with the rise of communism.
Third era: from 2000 to the present. Global inequality began to decrease in the 21st century, from a Gini score close to 70 in 2000, to the present Gini coefficient of 60, an inequality score not achieved since 1900. The decrease has been driven mostly by the economic rise of Asian countries, especially China, which made a major contribution to reducing global inequality due to the fact that its economy started from a low base in 2000 and grew at a very high rate for the next couple of decades. In addition, given its large population, China’s growth affected between one-fourth and one-fifth of the world’s population. Over the next few decades, India could play a similar role in driving down global inequality given its large population and low economic base.
Overall, the first era was one of global divergence, given the rapid industrialization of the West and Japan and the economic stagnation of most of the rest of the world, while the third and current era has been one of global convergence, given the rapid industrialization of China and other Asian countries.
However, while global inequality has rapidly decreased over the past two decades, inequality has been rising within a number of large countries including the US, China, India, Russia, and some countries in Western Europe. For example, the post WWII decades were a period of low inequality in the US, reaching a Gini score of 35 in 1980, but inequality steadily increased in the subsequent decades reaching the current score of around 41. China’s Gini coefficient was 30 in 1980, rising to a maximum of around 55 in the early 2000s, and is presently around 40. Germany’s Gini score reached a low of 28 in 1995, and is now around 32.
The article points out that for most of the 19th and 20th centuries, people in rich countries with relatively low incomes ranked quite high in the global income distribution. For example, in 1988 the average American in the lowest income decile ranked at the 74% level in terms of global income; that same year, the average Italian in his country’s lowest income decile ranked at the 73% level of global income; and in 1993, the average German in the lowest decile ranked at the 83% level globally. On the other hand, in 1988, urban Chinese dwellers in the lowest decile ranked at roughly the 15% level of global income, and those earning the median income in China ranked around 45% globally.
But, given the global convergence of the past few decades, by 2018 the incomes of urban Chinese had significantly increased, while those of advanced economies decreased. In 2018 urban Chinese at the lowest decile were now at the 39% globally, and those earning the median income had increased from the 45% level of global income in 1988 to around the 74% level. In 2018, the average American in the lowest income decile was now at the 67% level of global income, the average German at the lowest decile was now at the 75% level, and the lowest decile Italians has slipped to the 53% level.
Unlike the low and middle income distributions, Western countries have continued to dominate the composition of income at the top levels. “In 1988, 207 million people made up the top five percent of earners in the world; in 2018, that number was 330 million, reflecting both the increase in the world population and the broadening of available data.” In both 1988 and 2018 American citizens made up over 40% of the top five percent of earners, — followed by British, Japanese, and German citizens. Overall, Westerners, including Japan, make up almost 80% of the top five percent of earners. Urban Chinese broke into this group only more recently, with a share of 1.6% in 2008, which increased to 5% in 2018.
“Whatever direction global inequality takes, considerable change lies ahead,” wrote Branko Milanovic in conclusion. “Unless Chinese growth slows substantially, the share of Chinese citizens among the upper reaches of the global income distribution will continue to rise, and correspondingly, the share of Westerners in that group will decrease. This shift will represent a marked change from the situation that has existed since the Industrial Revolution, with people from the West overwhelmingly represented at the top of the global income pyramid and even poor Westerners ranked high in global terms. The gradual slide in the global income position of the lower and lower-middle classes in the West creates a new source of domestic polarization: the rich in a given Western country will remain rich in global terms, but the poor in that country will slide down the global pecking order.”
Comments