June 16, 2023 Global Equality and Its Discontents We live in an age of inequality—or so we’re frequently told. 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. 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. Zoom out beyond the level of the nation-state to the entire globe, and the picture looks different. 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. By Branko Milanovic for FOREIGN AFFAIRS The term “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. It is commonly measured by the Gini coefficient, which runs from zero, a hypothetical case of full equality in which every person earned the same amount, to 100, another hypothetical case in which a single individual made all the income. Thanks to the empirical work of many researchers, economists can draw the overall contours of the change in estimated global inequality over the past two centuries. From the advent of the Industrial Revolution in the early nineteenth century to about the middle of the twentieth century, global inequality rose as wealth became concentrated in Western industrialized countries. It peaked during the Cold War, when the globe was commonly divided into the “First World,” the “Second World,” and the “Third World,” denoting three levels of economic development. But then, around 20 years ago, global inequality began to fall, largely thanks to the economic rise of China, which until recently was the world’s most populous country. Global inequality reached its height on the Gini index of 69.4 in 1988. It dropped to 60.1 in 2018, a level not seen since the end of the nineteenth century. Progress toward greater global equality is not inevitable. China has now grown too wealthy to help meaningfully reduce global inequality, and big countries such as India may not grow to the extent necessary to have the kind of effect China did. Much will depend on how countries in Africa fare; the continent could power the next great reduction in global poverty and inequality. But even if global inequality falls, that does not mean that the social and political turmoil in individual countries will diminish—if anything, the opposite is true. Because of vast differences in global wages, poor Westerners for decades have ranked among the highest-earning people in the world. That will no longer be the case as non-Westerners with rising incomes will displace poor and middle-class Westerners from their lofty perches. Such a shift will underscore the polarization in rich countries, between those who are wealthy by global standards and those who are not. THE THREE AGES OF INEQUALITY The first era of global inequality stretches from roughly 1820 to 1950, a period characterized by the steady rise of inequality. Around the time of the Industrial Revolution (approximately 1820), global inequality was rather modest. The GDP of the richest country (the United Kingdom) was five times greater than that of the poorest country (Nepal) in 1820. (The equivalent ratio between the GDPs of the richest and poorest countries today is more than 100 to 1.) An overall Gini score of 50 in 1820 is typical of very unequal countries today, such as Brazil and Colombia, but when considering the world writ large, such a level of inequality is actually rather low. (For perspective, the United States currently has a Gini score of 41 while Denmark, a social democracy that prides itself on its egalitarianism, has a score of 27.) The growth of global inequality during the nineteenth century and the first half of the twentieth century was driven both by widening gaps between various countries (measured by the differences in their per capita GDPs) and by greater inequalities within countries (measured by the differences in citizens’ incomes in a given country). The country-to-country differences reflected what economic historians call the Great Divergence, the growing disparity between, on the one hand, the industrializing countries of western Europe, North America, and, later, Japan, and, on the other hand, China, India, the African subcontinent, the Middle East, and Latin America, where per capita incomes stagnated or even declined. This economic divergence had a political and military corollary, with rising imperial states leaving moribund or conquered ones in the dust. This period coincided with the European conquest of most of Africa, the colonization of India and Southeast Asia, and the partial colonization of China. The second era extends over the latter half of the twentieth century. It featured very high global inequality, fluctuating between 67 and 70 Gini points. Inequality among countries was extremely high: in 1952, for instance, the United States boasted a per capita GDP 15 times that of China; with six percent of the world’s population, the United States produced 40 percent of global output. Inequality within countries, however, was falling nearly everywhere. It fell in the United States as higher education became more broad based and affordable for the middle classes and the rudiments of a welfare state emerged; it fell in communist China with the nationalization of large private assets in the 1950s and then the compulsive egalitarianism of the Cultural Revolution; and it fell in the Soviet Union as the Soviet leader Nikita Khrushchev’s reforms cut the excessively high wages and perks of the Stalinist nomenklatura. The second half of the twentieth century—the time of highest global inequality—was also the time of the “Three Worlds”: the First World of rich capitalist countries, mostly in western Europe and North America; the Second World of the somewhat poorer socialist countries, including the Soviet Union and eastern Europe; and the Third World of poor countries, most in Africa and Asia and many just emerging from colonization. Latin American countries are often added to this last group, even though they were, on average, richer than other Third World countries and had enjoyed independence since the early nineteenth century. That era continued in the decade following the end of the Cold War but gave way to a new phase at the turn of the twenty-first century. Global inequality began to dip about two decades ago and continues to do so today. It has dropped from 70 Gini points around the year 2000 to 60 Gini points two decades later. This decrease in global inequality, having occurred over the short span of 20 years, is more precipitous than was the increase in global inequality during the nineteenth century. The decrease is driven by the rise of Asia, particularly China. The country made a massive contribution to the reduction in global inequality for a number of reasons: its economy started from a low base and could thus grow at a spectacular rate for two generations, and by virtue of the country’s population, the growth touched between one-fourth and one-fifth of all people on earth. Both by dint of its large population and its relative poverty, India, the world’s most populous country, could play a role similar to the one China has played over the last 20 years. If more Indians become wealthier in the coming decades, they will help drive down overall global inequality. Many uncertainties cloud the future of the Indian economy, but its gains in recent decades are indisputable. In the 1970s, India’s share of global GDP was less than three percent, whereas that of Germany, a major industrial power, was seven percent. By 2021, those proportions had been swapped. But even as overall global inequality has dropped since the turn of the century, inequality has risen in many big countries, including China, India, Russia, the United States, and even the welfare states of continental Europe. Only Latin America has bucked the trend by reducing its high inequality through broad redistributive programs in Bolivia, Brazil, Mexico, and elsewhere. The third era mirrors the first: it has seen the rise of incomes in one part of the world and their relative decline in another. In the first era, it was the industrialization of the West and the concurrent deindustrialization of India (then under the thumb of the British, who suppressed local industries); in the third, it was the industrialization of China and, to some extent, the deindustrialization of the West. But the current era has seen the opposite effect on global inequality. In the nineteenth century, the rise of the West led to growing inequalities between countries. In the more recent period, the rise of Asia has led to a decline in global inequality. The first period was one of divergence; the current period is one of convergence. NOT SO LONELY AT THE TOP Drill down to the level of a single person, and what becomes apparent is probably the greatest reshuffling of individual positions on the global income ladder since the Industrial Revolution. Of course, people tend to care about their status in relation to those around them, not necessarily with respect to others far away, whom they will rarely meet. But slipping in the global income rankings does have real costs. Many globally priced goods and experiences may become increasingly unavailable to middle-class people in the West: for example, the ability to attend international sporting or art events, vacation in exotic locations, buy the newest smartphone, or watch a new TV series may all become financially out of reach. A German worker may have to substitute a four-week vacation in Thailand with a shorter one in another, perhaps less attractive location. A hard-pressed Italian owner of an apartment in Venice may not be able to enjoy it because he needs to rent it out year-round to supplement his income. People in the lower-income groups of rich countries have historically ranked high in the global income distribution. But they are now being overtaken, in terms of their incomes, by people in Asia. China’s rapid growth has reshaped all aspects of the global income distribution, but the change is most pronounced around the middle and upper-middle of the global rankings, the part typically full of working-class people in Western countries. Higher up, in the top five percent of income earners in the world, Chinese growth has made less of an impact because not enough Chinese have become so rich as to displace the richest Westerners, in particular Americans, who have historically dominated the very top of the global income pyramid in the past 150 to 200 years. The graph below, which demonstrates how global income rankings have changed for people in different countries, shows the positions of Chinese urban deciles (each decile is composed of ten percent of that country’s population, ranked from the poorest to the richest) compared with Italian deciles in 1988 and 2018. I use data for Chinese city dwellers because China conducts separate household surveys for urban and rural areas and because China’s urban population (now over 900 million people) is much more strongly integrated with the rest of the world than its rural population. Urban Chinese moved up between 24 and 29 global percentiles, meaning that people in a given Chinese urban decile leapfrogged over one-fourth or more of the world’s population in just 30 years. For example, in 1988, a person with the median urban Chinese income would have ranked around the 45th income percentile globally. By 2018, such a person would have advanced to the 70th percentile. This is no surprise in light of the extraordinarily high per capita GDP growth rate in China over that period—an average of around eight percent per year. But the growing standing of Chinese earners has resulted in the relative decline of those in other countries. Italy provides the clearest example of this effect. Between 1988 and 2018, average Italians in the country’s bottom decile have seen their global ranking slide by 20 percentiles. The second and the third lowest Italian deciles have fallen globally by six and two percentiles, respectively. The global position of wealthy Italians, meanwhile, has barely been affected by the rise of China: wealthier Italians, it turns out, tend to sit above the part of the global distribution where Chinese growth has wrought tremendous change. The changes observed in Italy are not unique to that country. The average German in his country’s poorest income decile has slipped from the 81st percentile globally in 1993 to the 75th percentile in 2018. In the United States, the average person in the poorest decile has moved down between 1988 and 2018 from the 74th to the 67th global percentile. But rich Germans and Americans have remained where they were before: at the top. The data reveal a striking story, one that is hard to detect when looking only at national studies of inequality: Western countries are increasingly composed of people who belong to very different parts of the global income distribution. Different global income positions correspond to different consumption patterns, and these patterns are influenced by global fashions. As a result, the sense of widening inequality in Western countries may become acute as their populations increasingly belong, measured by income levels, to very different parts of a global income hierarchy. The social polarization that would ensue would make Western societies resemble those of many Latin American countries, where gulfs in wealth and lifestyle are incredibly pronounced. Unlike the middle of the global income distribution, the composition of the top has remained much the same over the previous three decades: dominated by Westerners. 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. They represent a group of people that can be called the “globally affluent,” sitting a rung beneath the more rarefied global top one percent. Americans make up the plurality of this group. In both 1988 and 2018, over 40 percent of the globally affluent were U.S. citizens. British, Japanese, and German citizens come next. Overall, Westerners (including Japan) account for almost 80 percent of the group. Urban Chinese broke into the globally affluent only more recently. Their share has gone up from 1.6 percent in 2008 to 5.0 percent in 2018. From Asian countries (excluding Japan), only urban Chinese really register among that group. The shares of urban Indians and Indonesians in the global top five percent were insignificant in 1988. These numbers rose only a little between 2008 and 2018: in the case of India, from 1.3 to 1.5 percent; Indonesia, from 0.3 to 0.5 percent. These proportions remain small. The same is true of people in other parts of the world, including Africa, Latin America, and eastern Europe, that, with the exception of people from Brazil and Russia, never had a significant participation among the globally affluent. The top of the global income distribution thus remains dominated by Westerners, especially by Americans. But if the gap in growth rates between East Asia, especially China, and the West persists, the national composition of the globally affluent will change, too. That change is indicative of the evolving balance of economic and political power in the world. What these individual-level data show is, as in the past, the rise of some powers and the relative decline of others. CATCHING UP The future direction of global inequality is hard to predict. Three external shocks make the current period unlike any that preceded it: the COVID-19 pandemic, which slashed countries’ growth rates (India’s, for instance, was negative eight percent in 2020); the deterioration of U.S.-Chinese relations, which, given that the United States and China account for over a third of global GDP, will invariably affect global inequality; and the Russian invasion of Ukraine, which has raised food and energy prices around the world and shaken the global economy. These shocks and their uncertain legacies make forecasting the future of global inequality an unenviable task for economists. Yet certain developments seem likely. For one, China’s increased wealth will limit its ability to lower global inequality, and its upper-middle and upper classes will start entering in great numbers the top of the global income distribution. The increased incomes of other Asians, from countries such as India and Indonesia, will have a similar effect. At some point in the coming decades, the shares of Chinese and American populations among the globally affluent might become approximately the same—that is, there may be as many wealthy people in China by global standards as there are in the United States. Such a development is important because it would reflect a wider shift of economic, technological, and even cultural power in the world. The world is the most equal it has been in over a century. To determine exactly when this could happen requires a fairly complicated calculation based on many assumptions, including about the future growth rates of the two economies, changes in internal income distributions, demographic trends, and the ongoing urbanization of China. But the most important factor in determining when the number of globally affluent Chinese people will equal the number of globally affluent Americans is the difference in GDP per capita growth rates between a more rapidly expanding China and the United States. That difference (known as “the growth gap”) was six percentage points in the 1980s and seven percentage points in the 1990s but rose to nine percentage points in the period between China’s accession to the World Trade Organization in 2001 and the global financial crisis in 2008. The difference has since decreased to about four and a half percentage points. That gap might shrink further to between two and four percentage points, as Chinese growth will likely decelerate in the coming years. Likewise, the population growth rates of the two countries may not differ much even if the United States currently boasts a slightly higher rate than China’s. With all that in mind, it is possible to estimate when the absolute number of Chinese people who earn incomes equal to or higher than the U.S. median income will match the absolute number of such Americans. (The latter are, by definition, one-half of the U.S. population.) At present, just under 40 million Chinese people fulfill that condition (as opposed to about 165 million Americans). But with a growth gap of around three percent per year, in 20 years the two groups would be of equal size; if the growth gap is smaller (say, only two percent per year), parity would be achieved a decade later. A generation or a generation and a half from now is less than the time that has elapsed from the opening of China in the 1980s to the present. China is tantalizingly close to something that no one would have predicted when Mao died in 1976: that in 70 years, the then impoverished country would have as many rich citizens as does the United States. THE AFRICAN ENGINE As a result of this dramatic transformation, China will no longer contribute to the decline in global inequality. African countries, however, may drive its future reduction. African countries need to grow faster than the rest of the world, especially faster than the rich countries in the Organization for Economic Cooperation and Development and China, to achieve that goal. They play a crucial role here not only because they are mostly poor but also because as birthrates are dropping below replacement levels around the world, Africa’s population is expected to grow in this century and perhaps even into the next. It seems unlikely, however, that Africa can replicate the recent economic success of Asia. Africa’s post-1950 record provides few grounds for optimism. Take as a hypothetical objective the rate of growth of five percent per capita maintained over at least five years, which is ambitious but not unattainable: only six African countries have succeeded in achieving it in the past 70 years. These exceptional episodes of growth involved in all but one case very small countries (in terms of population) and those whose growth depended on an export commodity (oil in the case of Gabon and Equatorial Guinea, and cocoa in the case of Côte d’Ivoire). Botswana and Cape Verde managed it, too, but they are very small countries. Ethiopia was the only populous country (with more than 100 million people) that sustained a high rate of growth, which it did for 13 consecutive years, from 2005 to 2017. This trend has since ended, owing to the outbreak of a new civil war in 2020 and renewed conflict with Eritrea. This simple exercise suggests that the most populous African countries—Nigeria, Ethiopia, Egypt, the Democratic Republic of the Congo, Tanzania, and South Africa—will have to buck historic trends to play the role that China has in recent decades in reducing global inequality. Of course, many observers thought it unlikely that Asia would see tremendous economic growth. The Swedish economist and Nobel Prize winner Gunnar Myrdal, for example, predicted in his 1968 book, Asian Drama: An Inquiry Into the Poverty of Nations, that Asia would remain poor for the foreseeable future, given its apparent overpopulation and limited technological progress. But just a decade after the publication of Myrdal’s book, the region began to register exceptionally high rates of growth and became a leader in some areas of technology. Counting Nigerian naira notes in Yola, Nigeria, February 2023 Esa Alexander / Reuters Aid is unlikely to be a significant driver of growth. The previous six decades of experience with Western aid to Africa unmistakably show that such support does not guarantee development in the country. Aid is both insufficient and irrelevant. It is insufficient because rich countries have never devoted much of their GDPs to foreign aid; the United States, the richest country in the world, currently gives away only 0.18 percent of its GDP in aid, and a significant portion of that is classified as “security related” and used for purchases of U.S. military equipment. But even if aid totals were greater, they would be irrelevant. The track record of African recipients of aid suggests that such support fails to generate meaningful economic growth. Aid is often misallocated and even stolen. It produces effects like those of the “resource curse,” in which a country blessed with a particularly valuable commodity still underperforms: it experiences tremendous initial gains without any meaningful follow-up or more sustainable, broadly shared prosperity. If Africa continues to languish, such stagnation will keep driving many people to migrate. After all, the gains from migration are enormous: a person with a median income in Tunisia who moves to France and starts earning there at, say, the 20th French income percentile would still have multiplied his earnings by almost three, in addition to creating better life chances for his children. Sub-Saharan Africans can gain even more by moving to Europe: a person earning the median income in Uganda who moves to Norway and earns at the level of the Norwegian 20th percentile will have multiplied his earnings 18-fold. The inability of African economies to catch up with wealthier peers (and thus fail to produce a future reduction in global income inequality) will spur more migration and may strengthen xenophobic, nativist political parties in rich countries, especially in Europe. Africa’s abundance of natural resources combined with its persistent poverty and weak governments will lead dominant global powers to vie over the continent. Although the West neglected Africa after the end of the Cold War, recent Chinese investments in the continent have alerted the United States and others to its importance. The U.S. Agency for International Development has indirectly flattered China by not only shifting its attention to Africa but also deciding to focus on more “brick and mortar” infrastructure projects, akin to those favored by China. African countries are learning that great-power competition might not be so bad for them after all, since they can play one superpower off another. But there is a grimmer scenario, in which the continent divides into allies and foes, who in turn compete or even go to war. That chaos would make the ideal of an African common market that could replicate the success of the European Economic Community even more remote. The prospect of an African growth surge that could meaningfully suppress global inequality in the coming years is slim. THE WORLD TO COME Whatever direction global inequality takes, considerable change lies ahead. 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. As for the downward trend in global inequality, it requires strong economic growth in populous African countries—but that remains unlikely. Migration out of Africa, great-power competition over the continent’s resources, and the persistence of poverty and weak governments will probably lie in Africa’s future as they have in its past. And yet a more equal world remains a salutary objective. Few thinkers better grasped the importance of equality among countries than the eighteenth-century Scottish philosopher Adam Smith, the founder of political economy. In his magnum opus, The Wealth of Nations, he observed how the gulf in wealth and power between the West and the rest of the world led to colonization and unjust wars: “The superiority of force [was] . . . so great on the side of the Europeans that they were enabled to commit with impunity every sort of injustice in those remote countries,” he wrote. Great disparities fueled violence and inhumanity, but Smith still saw reason for hope. “Hereafter, perhaps, the natives of those countries may grow stronger, or those of Europe may grow weaker,” Smith imagined. “And the inhabitants of all the different quarters of the world may arrive at that equality of courage and force which, by inspiring mutual fear, can alone overawe the injustice of independent nations into some sort of respect for the rights of one another.” READ AND SUBSCRIBE TO FOREIGN AFFAIRS Share:EmailFacebookTwitterPrint
