02/04/2015 16:22The Winners and Losers of Globalization: Finding a Path to Shared Prosperity

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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, aswell 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

FEATURE STORY

The Winners and Losers of Globalization:Finding a Path to Shared ProsperityOctober 25, 2013

02/04/2015 16:22The Winners and Losers of Globalization: Finding a Path to Shared Prosperity

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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 AsliDemirguc-Kunt, who hosted the event. “Boosting shared prosperity also requires us to tackle inequality, not justwithin countries, but across countries as well, as globalization has made it easier for goods and people to movearound the world.”

The new global middle class, about 400 million people, earned more and consumed more in the 20-year spanbefore 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 the1980s. He made the cross-country comparisons using a newly-created database of World Bank- managedhousehold 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 and2008. 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 morethan 60 percent during the 20-year period. In absolute terms, they saw their incomes increase by nearly $23,000per 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 incomedid increase for the bottom and the second-lowest deciles.

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 thelower-middle class of rich countries, as well as many people in Latin America and former Communist countries inEastern Europe.

Inequality between nations also grew, despite the recent drop in global inequality between individuals. In fact, thedivisions 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 wereduce 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 andIndia maintaining their high growth rates. In fact, the decline of global inequality so far is largely due to the high

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

Branko MilanovicLead Economist, Research Department, World Bank

02/04/2015 16:22The Winners and Losers of Globalization: Finding a Path to Shared Prosperity

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growth rates of China and India – what Milanovic called “two big sumo wrestlers” tilting the scales in the fight toreduce 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’tshowing any signs of increasing.

The third path would be to promote migration, which can be an expeditious way for people to improve theirfortunes. That means development should be seen through the prism of people, not countries. From a global pointof view – though not necessarily from a nation-state political point of view – what matters is that people shouldprosper, 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 eventthat Milanovic made income distribution, a complex subject, easy to understand. Policy makers, he said, canbenefit from the research by, for example, making sure that energy subsidies, which are highly regressive andbenefit largely the middle- and higher-income groups, are phased out. The resources can then be used in moreproductive ways, such as educating 800 million people with low levels of literacy skills, or ensuring that girls havegreater access to education.

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