Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Global income inequality: time to revise the elephant

Branko Milanovic 5th December 2022

New data on inequality show probably the greatest reshuffling of world incomes since the industrial revolution, Branko Milanovic writes.

income inequality,inequality,Gini,1 per cent,elephant chart,elephant
Idumota Market in Lagos—China’s rise could leave populous African countries such as Nigeria further behind (Santos Akhilele Aburime / shutterstock.com)

The global distribution of incomes has been changing without us noticing very much.

The period of ‘high globalisation’, which ran from the end of Communism in the late 1980s to what became known as the Global Financial Crisis in 2008, was perhaps best described by the so-called elephant chart (the blue curve in the figure below), produced by Christoph Lakner and myself. It showed a very high increase in incomes over these two decades around the middle of the global distribution, point A (call it ‘the China effect’), very modest or close to zero growth around the 80th percentile of the distribution, point B (where the lower middle classes of rich countries are), and a sharp increase among the global top 1 per cent, point C.

income inequality,inequality,Gini,1 per cent,elephant chart,elephant

The popularity of the ‘elephant chart’ was due to its empirical confirmation of what many thought. Rapid increase in Asian incomes coincided with—and perhaps was causally related to—the decline of the western middle classes, as well as the rise of the global 1 per cent.

This pattern of income growth did not however continue unchanged during the decade 2008-18, ending just before the pandemic. The new data show both continuity and change (the orange graph). The continuity is represented by high, even accelerated growth of real incomes in Asia; the change is represented by a significant slowdown in growth among the global top of the distribution.

Western slowdown

To understand both, we have to go back to the effects of the crisis of 2008. In reality it was a northern-Atlantic crisis. While the growth of rich countries in Europe and north America decelerated or even turned negative (for members of the Organisation for Economic Co-operation and Development as a whole it was negative in both 2008 and 2009), growth in Asia, and especially in China, was practically unaffected.

The western slowdown, due to the financial nature of the crisis, hurt the richest income groups. What happened in the United States is the most instructive, as well as the most important, because US citizens account for almost half of the global top 1 per cent.

According to US income surveys (further harmonised by the Luxemburg Income Study), the top 5 per cent of the US population lost about 10 per cent in real terms between 2008 and 2010, with the richest 1 per cent seeing their incomes go down by almost a fifth. In the next few years they recovered but they reached the 2007 level only in 2015. For the US richest, and by extension for the globally rich, almost a full decade was ‘lost’. This explains why the trunk of the ‘elephant’ (representing the income growth of the globally rich) was lowered compared with the period of high globalisation.

Incidentally, and going beyond the time boundary of our analysis (2008-18), the most recent years show a continuation of this trend for the US. The very large support programme in the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in 2020 resulted in a substantial decrease in post-transfers and post-tax income inequality. The Gini coefficient—which ranges from a complete-equality zero to an infinite-inequality 100—for the US decreased by more than one point, the largest fall in half a century. One of the ironies is that this large decline occurred during the last year of the Donald Trump presidency.

Continued growth in Asia

Going back to what happened between 2008 and 2018, we note the continuation of fast Chinese and Indian growth. In terms of gross domestic product per capita, China grew at 7.5 per cent per year, India 6 per cent. This growth shows also in their household surveys. For example, for both urban and rural China the surveys give an average per capita annual growth of about 10 per cent, for urban India 8 per cent and for rural India just below 5 per cent.

This continued growth in Asia fundamentally transformed global income distribution in two ways. It increased the size of the global ‘median’ class and it produced a reshuffling of global income positions. The former means that the ‘thickness’ of the middle part of the global distribution is greater now. The latter means that as Asian incomes grew people from Asia displaced in the global ranking many people from the lower parts of rich countries’ distributions.

This effect may be best illustrated by Italy, which did not grow in over two decades. The lowest decile of Italians were in 1988 at the 73rd global percentile; 20 years later, as Asian incomes grew and as large groups from urban China achieved higher incomes than the Italians, these lower-income Italians slid down the global pecking order to the 56th global percentile. Similar but less dramatic downward movement affected the bottom third of the German and American populations.

Such downward movement is ‘positional’: it need not imply a decline in real incomes and in many cases real incomes did not go down. What it does imply however is slower income growth among rich countries’ deciles ‘within the range’ of rising Chinese incomes.

New global dynamic

The current reshuffling represents probably the largest since the industrial revolution. It introduces an entirely new global dynamic, because during the last two centuries people from western countries and Japan were almost fully ‘in control’ of the global top quintile. (Of course, many people from other counties were in the top quintile too but they were not there in millions.) This ‘control’ has already weakened with the entry of China into that circle and, if the differentials in the growth rates between ‘the emerging’ Asia and the west continue, it will weaken even further.

Reshuffling in positions by itself does not imply a reduction in global inequality. Since the beginning of the current globalisation era, inequality has been reduced almost entirely on account of rapid Chinese growth. But now as China is an upper-middle-income country, mathematically its further growth no longer reduces global inequality. Indeed, it could begin to add to global inequality, as the distance in incomes between China and the very populous African countries grows.  

Thus while in the next stage of globalisation we may expect further strengthening of the global ‘median’ or middle class, what happens to global inequality will crucially depend on the growth of India and of the populous African countries: Nigeria, Egypt, Ethiopia, Tanzania, Congo. Our attention should be directed towards Africa.

This is a joint publication by Social Europe and IPS-Journal

Pics3
Branko Milanovic

Branko Milanovic is a Serbian-American economist. A development and inequality specialist, he is visiting presidential professor at the Graduate Center of City University of New York and an affiliated senior scholar at the Luxembourg Income Study. He was formerly lead economist in the World Bank's research department.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u421983467f bb39 37d5862ca0d5 0 Ending Britain’s “Brief Encounter” with BrexitStefan Stern
u421983485 2 The Future of American Soft PowerJoseph S. Nye
u4219834676d582029 038f 486a 8c2b fe32db91c9b0 2 Trump Can’t Kill the Boom: Why the US Economy Will Roar Despite HimNouriel Roubini
u42198346fb0de2b847 0 How the Billionaire Boom Is Fueling Inequality—and Threatening DemocracyFernanda Balata and Sebastian Mang
u421983441e313714135 0 Why Europe Needs Its Own AI InfrastructureDiane Coyle

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

KU Leuven advertisement

The Politics of Unpaid Work

This new book published by Oxford University Press presents the findings of the multiannual ERC research project “Researching Precariousness Across the Paid/Unpaid Work Continuum”,
led by Valeria Pulignano (KU Leuven), which are very important for the prospects of a more equal Europe.

Unpaid labour is no longer limited to the home or volunteer work. It infiltrates paid jobs, eroding rights and deepening inequality. From freelancers’ extra hours to care workers’ unpaid duties, it sustains precarity and fuels inequity. This book exposes the hidden forces behind unpaid labour and calls for systemic change to confront this pressing issue.

DOWNLOAD HERE FOR FREE

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641