Examining an elephant: globalisation and the lower middle class of the rich world

Published on Incomes and Inequality

The UK’s vote to leave the EU, the US presidential election and proposed free trade deals have all prompted renewed debate about the winners and losers of globalisation. The two decades before the financial crisis were “a heyday of global trade integration” in which international trade as a share of the global economy rose dramatically. Properly understanding the impact of this, and the nature of any losses, is key to ensuring that the renewed debate on globalisation focuses on the right questions. This paper explores how incomes across the world have changed over this period and what conclusions we can and cannot draw from such figures, focusing on the experience of low and middle income households in the richer world.

  • The ‘elephant curve’ created by Branko Milanovic and Christoph Lakner – and described as “the most powerful chart of the last decade” – has been used to help describe what has happened in the “high globalisation” period of 1988-2008. It suggests very strong growth for the global middle class (such as China’s population); apparent near-stagnation for the “lower middle class of the rich world”; and much stronger growth for the global top 1 per cent. But there is a risk of misunderstanding or over-extrapolating from this work.
  • A deep exploration of the data behind the elephant curve and the reasons for its characteristic shape show that the average incomes of the lower and middle classes of rich Western countries have not in general stagnated over this period, though the US has experienced particularly unequal growth.
  • There is however a large variation between mature economies, suggesting we should be cautious about assuming that global forces mean the level of income growth for the lower middle class of the rich world is inevitable or that domestic policy choices do not play a big role.
  • Globalisation undoubtedly creates challenges as well as opportunities, with international competition creating some losers at local, sectoral and individual levels. But those striving for more inclusive growth have a much harder task than simply preventing or reversing globalisation, given the demonstrable importance of domestic policy areas such as welfare policy, housing costs and economic stability.