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FEATURE STORY

The Winners and Losers of Globalization: Finding a Path to Shared Prosperity

October 25, 2013

Left to right: Kaushik Basu, Branko Milanovic, Asli Demirguc-Kunt, Augusto Lopez-Claros

STORY HIGHLIGHTS
  • The global middle class was created by, and benefited from, globalization
  • Boosting shared prosperity requires addressing global inequality
  • Incomes are mainly determined by citizenship

Globalization has benefited an emerging “global middle class,” mainly people in places such as China, India, Indonesia, and Brazil, along with the world’s top 1 percent. But people at the very bottom of the income ladder, as well as the lower-middle class of rich countries, lost out.

The findings, presented by economist Branko Milanovic to a packed audience of more than 120 people at a Policy Research Talk at the World Bank earlier this month, come just as the institution mobilizes around two goals: ending extreme poverty by 2030 and boosting the income growth of every country’s bottom 40 percent.

“Those goals are very ambitious, since the pace of growth is uncertain,” says World Bank Research Director Asli Demirguc-Kunt, who hosted the event. “Boosting shared prosperity also requires us to tackle inequality, not just within countries, but across countries as well, as globalization has made it easier for goods and people to move around the world.”

The new global middle class, about 400 million people, earned more and consumed more in the 20-year span before the global financial crisis hit in 2008, propelled by economic growth in countries such as India and China, said Milanovic, a lead economist in the Bank’s research department who has been studying inequality since the 1980s. He made the cross-country comparisons using a newly-created database of World Bank- managed household surveys that covers some 120 countries from 1988 to 2008.

The inflation-adjusted real income for the group around the global median rose 80 percent between 1988 and 2008. Their incomes, however, were still a paltry $3 to $5 per capita per day.

Not surprisingly, the top 1 percent of the world’s earners were big winners. Their real income went up by more than 60 percent during the 20-year period. In absolute terms, they saw their incomes increase by nearly $23,000 per capita per year, compared with some $400 for those around the median.

By contrast, incomes were almost stagnant among the world’s poorest 5 percent, despite the fact that real income did increase for the bottom and the second-lowest deciles.

Open Quotes

Either poor countries will become richer, or poor people will move to rich countries Close Quotes

Branko Milanovic
Lead Economist, Research Department, World Bank

Least satisfactory was the outcome for the people in the 75th to 90th percentile of the global income distribution, who saw zero growth in their real income. Those people represent a global upper-middle class, including the lower-middle class of rich countries, as well as many people in Latin America and former Communist countries in Eastern Europe.

Inequality between nations also grew, despite the recent drop in global inequality between individuals. In fact, the divisions between countries are more pronounced than those between different income classes within countries, Milanovic said. More than half of the variability in people’s incomes across the globe is simply due to one factor: the place where one lives.  

The reality that opportunities are highly unequal, depending on where you live raises a question: How can we reduce global inequality? Milanovic pointed out three paths. First, high growth rates among poor and middle-income countries. That would be the best path, but it’s not easily achievable. It also largely depends on China and India maintaining their high growth rates. In fact, the decline of global inequality so far is largely due to the high growth rates of China and India – what Milanovic called “two big sumo wrestlers” tilting the scales in the fight to reduce global poverty and inequality.

A second path would be a global redistribution scheme pushing ever larger amounts of money to poor countries. That isn’t likely to happen, as development assistance is just a little more than $120 billion a year, and isn’t showing any signs of increasing.

The third path would be to promote migration, which can be an expeditious way for people to improve their fortunes. That means development should be seen through the prism of people, not countries. From a global point of view – though not necessarily from a nation-state political point of view – what matters is that people should prosper, wherever they end up.

“Either poor countries will become richer, or poor people will move to rich countries,” Milanovic said.

Augusto Lopez-Claros, director of the World Bank Group’s Global Indicators and Analysis Group, said at the event that Milanovic made income distribution, a complex subject, easy to understand. Policy makers, he said, can benefit from the research by, for example, making sure that energy subsidies, which are highly regressive and benefit largely the middle- and higher-income groups, are phased out. The resources can then be used in more productive ways, such as educating 800 million people with low levels of literacy skills, or ensuring that girls have greater access to education.