Developed countries’ economies were enjoying robust growth in the first half of 2008, despite some initial cracks that had been appearing since the previous summer. That was ten years ago, and since then, world economic dynamics have transformed completely, as the sources of momentum and adjustment systems have changed, especially in developed countries.
We could potentially identify a whole raft of differences but I have focused on six that I feel are useful in helping us understand the new world economic order.
1 – World trade is no longer growing at the same pace
World trade has entirely changed pace since the crisis in 2008. Before that date, it fluctuated fairly broadly around a trend estimated at 6.8% per year in volume terms, thereby creating a strong source of momentum in each economy and driving economic growth, with an overall virtuous dynamic between trade and economic activity.
But since 2011, world trade has seen little fluctuation and the trend is now at 2.3%. The turning point in 2011 can be attributed to austerity policies and in particular programs implemented in Europe. So momentum that can be expected across the rest of the world is no longer on a par with past showings. This change is significant for Europe as the continent used to wait for the rest of the world to pick up a pace before staging its own improvement, and this explains the systematic time lag in the cycle between the US, which traditionally recovered very sharply after a negative shock, and Europe, which always seemed to be lagging slightly. Continue reading
The report published recently by the Paris School of Economics measures income and wealth inequality around the world and reveals the high share of total income accounted for by the top earners, reflecting a very worrying situation. The report notes that the top 1% of earners worldwide captured 27% of total income growth since 1980 (net of inflation), while the bottom 50% captured only 12% of income growth over the same period. The world’s reference points have definitely changed over this period. Individual country income-inequality trajectories are sometimes even more stark, but inequality in Europe has remained relatively stable since 1980.
Income distribution inequality raises a number of questions, particularly the challenge of achieving strong and sustainable growth. If growth only benefits a very small minority, then our aims cannot merely be restricted to growth at any price. The trickle-down theory whereby the poor derive benefits when the rich get richer is clearly not working, so it is vital to come up with different targets and mechanisms alongside growth to ensure a more balanced society. Continue reading
This graph illustrates an article by David Leonhardt (NY Times) on the US income distribution.
It shows how the income distribution has changed between 1980 and 2014.
In 1980, there was a catch-up effect for low incomes. Their growth rate was higher than the average and higher than high incomes. For the lowest 20%, the 1980 income growth was higher than the average (2.5% inflation adjusted growth)
In 2014, every percentile has an income growth that is lower than percentiles higher on the distribution. There is no more catch-up but divergence.
For the highest 20%, the 2014 income growth was higher than the average (1.4% inflation adjusted growth).
The proposal made by Donald Trump and the Republicans to lower tax rates would accentuate the divergence of the income distribution. It would be negative for the economy.
« Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough. »
A national accounts framework that can show the income distribution by decile is a priori fascinating. Piketty, Saez and Zucman have done that for the US. It allows to look at income shares through time. They show that the first 5 déciles share in national income intersects this share of the top 1% in the 90’s. The first five déciles share went from circa 20% in the 70’s to a little more than 12% in 2014. The top 1% has had a profile that mirrored this trajectory from 11% to 20%.
A comparison of the first five déciles share between the US and France shows that French people have had really a better situation.
The summary of a detailed document is available here
Branko Milanovic (@BrankoMilan) shows, with a simple graph, one of the most important change seen since the end of last century. His question was related to real income distribution but not in a country but at a global scale from 1988 to 2008.
He has calculated the income growth on this period for each percentile of the global income distribution.
The graph is shown below and looks like an elephant (see at the bottom of the post)
Three points to be mentioned
People leaving close to the median (point A), mainly Chinese and Indian, have income that grown by circa 80% from 1988 to 2008. This is absolutely spectacular on such a short period of time.
On the contrary, people at point B have had at best stagnant real revenues. These people belongs to the lower halve of the income distribution in developed countries. The immediate question is whether the improvement seen in A is the counterparty of B? In other words, is there a trade off for income between emerging and developed countries at the expense of the latter? Could be, that’s the type of answer that is given by David Autor ( @davidautor )
Point C corresponds to the highest percentile, mainly American people.
The greatest reshuffle of individual incomes since the Industrial Revolution
The effects of trade, or more broadly of globalisation, on incomes and their distribution in the rich countries have been much studied, beginning with a number of works on wage distributions in the 1990s, to more recent papers on the effects of globalisation on the labour share (Karabarbounis and Neiman 2013, Elsby et al. 2013), wage inequality (Ebenstein et al. 2015), and routine middle class jobs (Autor and Dorn 2010).
In joint work with Christoph Lakner (Lakner and Milanovic 2015) and in a recently published book, Global Inequality: A New Approach for the Age of Globalization (Milanovic 2016), I take a different approach of looking at real incomes across the world population. This is made possible thanks to the data from almost 600 household surveys from approximately 120 countries in the world covering more than 90% of the world population and 95% of global GDP. Since household surveys are not available for all countries annually, the data are ‘centred’ on benchmark years, at five-year intervals, starting with 1988 and ending in 2008. I report the results for up to 2011 in Milanovic (2016), while Lakner has an unpublished update for 2013. The updates confirm, or reinforce, the key findings for 1988-2008 that I discuss here.
The advantage of a global approach resides in its comprehensiveness and the ability to observe and analyse the effects of globalisation in many parts of the world and on many parts of the global income distribution. While the true or putative effects of globalisation on working class incomes in the rich world have become the object of fierce political battles – especially in the wake of the Brexit vote and the rise of Donald Trump to political prominence in the US – the overall effects of globalisation on the rest of the world have received less attention, and when they have, were studied separately, as if independent, from the effects observed in the rich word.