Thursday, December 14, 2017

The ABC of globalization (text for Le Monde)

There is perhaps no better short-hand description of the economic changes, and political challenges, that have emerged during the current epoch of globalization than what has become known as the “elephant chart”. It shows on the horizontal axis the position of an individual in the world distribution of income (with the poorest people on the left and the richest on the right) and on the vertical axis, the real income increase (compared to one’s original income) during the past 25 or 30 years.

It its stylized version shown below, three points stand our. 

Point A is composed of Asian middle class whose incomes have grown significantly, in some cases, as in China, trebling or even quadrupling over the period.

Point B—with people richer than the Asian middle class—shows almost complete absence of growth: it consists of western working and middle classes.

Point C, the richest people in the world, have doubled or more their income and wealth. The graph has been produced in many different forms, using slightly different data, most recently in the just released World inequality Report 2018 where the point C is shown to have gained even more than was previously thought.

But the key message of the graph is a summary of winners and losers of globalization: the winners are the global rich and Asia, the losers the middle classes of the West. They are squeezed between competition and indifference: competition of people who are able and willing to do the same jobs for a smaller wage, and indifference of their own rich compatriots towards their plight.

But here, starting from this graph, I want to move to look at the future. Let us try to imagine how the graph would look if done in 2050. It is unlikely that the currently rich world would grow in the next decades at the rates of the Asian giants, China, India, Vietnam, Thailand, Indonesia. This then means that the Asian middle class will gradually move to the right in the graph, towards higher income positions entering into the “territory” currently occupied by the Western middle classes. In the global income ranking, Western middle classes that are currently placed around the 80th-90th  global percentiles will start shifting downward, their positions taken by the upcoming middle class of Asia. Note that for this reshuffling to happen, Western incomes need not decline: they just need to grow less fast than Asia’s. The Western top of the income distribution would still remain at the point C although their ranks would be increasingly joined (as they already are) by the wealthy Chinese and Indians.

What would this slide in the relative position of the Western middle class mean? To see that one needs to realize that, from the 1950s to the end of the 20th century, Western societies (inclusive of their working classes) have occupied the “privileged” position in the world; they were all in the upper ranges of the global income distribution. In many European countries with strong welfare states, even the poorest members are part of the global top quintile (20% of the population).

This imparted some behavioral, consumption and even political homogeneity to the Western societies. But, were the Western middle classes to slide downwards, homogeneity would be less. Take one example: it has become quite common  for the middle or even lower layers of Western societies to vacation in Asia. But as Asia grows richer, the costs of such vacations will become prohibitive and affordable only to the rich Westerners,  perhaps no less than are costs of current vacations in Japan. In an interdependent world where lots of income is spent on services, the consumption patterns may change simply because of one’s change in relative income position, not necessarily because of one’s impoverishment.

The Western societies will then come to resemble what we currently see in Latin America: there would be rich people with incomes and pattern of consumption of the global top 1%, sizable middle class, but also significant number of people who are, in worldwide terms, relatively poor, with incomes below the world median. The Western societies will thus become much more heterogeneous even without a further increase in their own income inequalities.

This then leads us to the crucial question: can societies where coexist people with income and consumption patterns that are quite different be democratic and stable? Wouldn’t such societies exacerbate the features of what used to be considered a Third World disease, social disarticulation, with the top prospering and perfectly well integrated into the global economy and the lower parts languishing and being overtaken by the middle classes of the emerging economies?  This is, I think, the key question that the politicians in today’s rich societies ought to ask themselves. 

(The text was published in French in Le Monde, December 14, 2017.)

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