Being Charged by an Elephant: A story of globalization and inequality

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Along with many economists and globalization scholars, my favorite graph these days is the elephant graph. Named for its distinctive elephant-shaped curve (see below), this graph shows the rise in real incomes for people in different income brackets throughout the world over a twenty year period of intense economic globalization (1998 to 2008). Economists often like to tell us that free trade is good because it is a rising tide that lifts all boats. What this graph suggests, however, is that economic globalization has produced clear winners and clear losers. This division seems to be playing an important role in explaining some of the rising nationalist and pro-protectionist sentiments we are witnessing in certain developed states, as shown by the rise of Trump and the vote for Brexit.

So who has won and lost in the age of economic globalization? According to the elephant graph, there have been two big winners. The first are individuals who sit in the lower to middle income tiers (between the 10th to the 65th percentiles) who have seen their real incomes go up by between 50 and 80 percent (marked as point 1 in the graph above). Although the incomes of individuals do not correlate perfectly with particular states, the vast majority of these individuals have come from the middle classes of some of the emerging economies like China and India.

The second are the richest individuals around the world, the global top 1 percent, whose real incomes have also risen sharply during this period (marked as point 3 above). Most, though clearly not all, of these individuals come from developed states and, in particular, from the United States. The global top 1 percent remains heavily dominated by individuals from developed states. Half of the global 1 percent is made up of Americans, with 11 to 12 percent of all Americans being included in the global top 1 percent. Not only have these individuals experienced strong growth in their real incomes in relative terms but, as they started from a much higher baseline, the absolute growth in their real incomes has been even greater.

But the biggest losers, at least in relative terms, are those individuals whose incomes lie at around the 75th to 85th percentile point. Again, these individuals do not map neatly onto specific states, but they include a significant proportion of some of the poor and working class people of developed states like the United States (marked as point 2 above). According to Branko Milanovic who created the chart, seven out of ten people at that point are from “old rich” OECD countries. Although these individuals are still relatively wealthy when compared to global averages, they have seen their real incomes largely stagnate over this 20 year period. Compared to others who have benefited greatly from economic globalization, many of these individuals feel left behind.

This graph provides a way of understanding two different narratives that have emerged in recent elections. A politician like Trump speaks to poor and working class voters (point 2) and says to them: America is being “raped” by China and “killed” by Mexico as a result of terrible trade deals that have ripped out the wealth of America’s middle class and redistributed it to other states around the globe (i.e., blame those at point 1). By contrast, a politician like Bernie Sanders speaks to those same disenchanted voters and says to them: the poor and working classes in America have been done over by a greedy elite while the middle class has been hollowed out by America’s failure to redistribute from the top 1 percent (i.e., blame those at point 3). One tells a story of too much international redistribution, the other a story of too little national redistribution.

As with many stories, both narratives have some truth to them and neither captures the full picture. Although the overall narrative surrounding the elephant graph is clear, the real story is –as always – more complicated. Some studies suggest that the poor and working classes in developed states have not seen their incomes go backwards, even if they have not reaped high rewards (particularly in comparison to some other groups). Factors other than economic globalization also influence the shape of the curve, such as compostitional issues (i.e., which states are included in the analysis), demographic changes (i.e., population sizes in many developing states have grown considerably faster than in most developed states, which affects the shape of the curve), and technology (i.e., many jobs have also been lost to automation rather than to foreign workers).

Even accounting for these nuances, two facts seem to remain. First, there has been a strong growth in real income for the middle classes in many developing states at the same time as there has been weak growth for the poor and working classes in many developed states. Although correlation does not equal causation, this does suggest that there is some truth to the first narrative framed above, particularly as economic globalization makes it easier to offshore manufacturing jobs from the developed to the developing world. Second, in line with the second narrative, domestic policies play a crucial role in redressing, or failing to redress, income inequality within states. Differences in how the various income brackets have fared within different developed states (like the United States and France) speak to the importance of issues such as tax and welfare policies in redressing inequalities that might be exacerbated by globalization. On these points generally, see here and here.

The elephant graph tells a powerful story about the relationship between globalization and both growing equality between states and growing inequality within states during a period of intense economic globalization. It is a story that has potentially significant domestic and international political implications. For instance, if the bottom incomes of rich states continue to stagnate while the middle incomes in various developing states continue to climb, does that mean that trade and investment treaties are likely to have ongoing destabalizing effects in developed states? If a strong democracy is correlated with having a large middle class, what will the hollowing out of the middle class mean for developed states, and the burgeoning of the middle class mean for developing states? And are we at risk of creating, or cementing, a global plutocracy as the richest 1 percent surge ahead?

This story of growing equality between states and growing inequality within states is also likely to underpin many of the developments in international economic law in the coming decades. In Africa, they tell you that if you are ever charged by an elephant, you should run for cover but, if you can’t reach cover in time, you must stand your ground and face the elephant. (As someone who was fortunate to survive being charged by an elephant whilst on foot in Tanzania, I can tell you that the advice to stand your ground is even harder to follow in practice than it sounds in theory … and it sounds very hard in theory.) With the rise of anti‑globalization sentiments in the United States, the United Kingdom and Europe, we may well see many developed states run for cover. Indeed, we have already seen Trump withdraw from the TPP, the TTIP negotiations be shelved and discussions about renegotiating NAFTA be put on the agenda.

However, many states in Asia have done well out of the last few decades of globalization. Indeed, of the people around the median whose real incomes almost doubled during this period, 9 out of 10 of these “winners” were from “resurgent Asia.” Perhaps it should come as no surprise, then, that China has become a champion of further international economic integration and many eyes have turned to focus on the ongoing RCEP negotiations, which is the mega-regional trade and investment agreement currently under negotiation among the ASEAN states and Australia, China, India, Japan, South Korea and New Zealand. Some members of the TPP are also looking to push that deal forward without the United States. It is too early to tell how these negotiations will play out. But, given the generally more positive experiences many of these states have had with economic globalization over the last few decades, states in the Asia Pacific seem to be more likely than others to stand their ground in the face of this charging elephant.

 

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    Kalypso Nicolaidis says

    April 19, 2017

    Excellent take! Everything is there in a nutshell. Would be good to supplement with corresponding comparisons in absolute figures...

    Patrick S. O'Donnell says

    April 19, 2017

    Thank you for this post, as it covers material I have been (informally) studying for some time, relying largely on economists who stand out from their brothers and sisters in the profession by writing in the classical tradition of political economy (e.g., Smith, Mill, and Marx). In the following, I attempt to make sense of capitalist economic globalization (this is an edited selection from a recent essay):

    A fairly large number of working class folks in the U.S. who voted for Trump appear to think that populist economic nationalism (granted, this may in some measure be merely a rhetorical smokescreen) and protectionist (or mercantilist) trade policies will perform an economic miracle, bringing about socio-economic security and the realization of middle-class dreams. (Ironically, or not, if one examines the early history of capitalism, protectionist policies and state intervention can—and have—work(ed) for emerging polities dedicated to economic development.) This demonstrates the remarkable effectiveness of being socialized into political and economic ideologies that refuse to historically and analytically conceptualize capitalism in its latest global incarnation. People simply don’t understand (or have succumbed to a colossal state of denial about) the “big-picture” consequences of the frenzied pursuit of profit and the ruthless competition between firms, including the endless search for cheap or cheaper labor markets. They appear to lack a sufficient grasp of the consequences of capital’s unbridled exploitation of technological innovation by way of supplanting (the costs of) labor. The intransigent nature of these ideologies (as well as the appalling dearth of historical knowledge) has not prepared them for the increasing frequency of “boom and bust” cycles or periodic general crises that are “natural” to capitalism. The intransigent nature of these ideologies has precluded a grasp of the historic role of organized labor, social democratic parties and Leftist social movements in enhancing the welfare and well-being of the lives of working people, in prompting changes that have mitigated the harshest effects of capitalism, and in acting as the principal collective agents for the melioration of capitalism itself. It is neither an incidental nor an accidental fact that “the dramatic rise in the ratio of profits to wages provides a material foundation for the sharp rise in the overall income inequality” (Anwar Shaikh), for in the absence of a strong and broad coalition of Leftist forces, capital has its way with labor, and the ill-effects reverberate throughout the social order (cf. Göran Therborn’s The Killing Fields of Inequality, 2013).

    Nation-states—or the State—can intervene directly in the balance of power between capital and labor, but when they (or it) systematically intervene on behalf of the former over the latter (with the collusion or collaboration of non-governmental global institutions like the IMF, World Bank, and now, although this may be changing, the WTO) the poor, working people, and those in the middle class will suffer (even neoliberals rely on the power of the State to implement fiscal conservativism and monetarist policies). There is evidence aplenty that this is already occurring with the Trump regime: the inability to see or acknowledge such evidence confirms once more the power of prevailing ideologies (wherein capitalism is ‘the best’ or ‘only’ economic system, the problem being solely which kind of capitalism one prefers). Yet “even in the best welfare states, social expenditures and taxes serve more to redistribute the living standard of labor than to change its average level. As a whole, labor largely pays for its own social benefits” (Anwar Shaikh). In short, the power of states to intervene in the operations of capitalism is severely constrained in a world of deregulated capital markets: states no longer have the same degree of power they once held in the period of “national capitalism” (a term that reminds us of the diminished power of Keynesian-inspired states to robustly ‘steer’ the economy and why Claus Offe wrote about the Contradictions of the Welfare State and Disorganized Capitalism). The current round of globalization is a conspicuous “combination of deregulated capital movements, advances in information/communication/transport technologies, and a shift in ideology away from social democracy [as well as the ‘Liberal’ capitalist ideologies that buttress liberal or corporatist welfare policies] and statism towards neoliberalism and libertarianism.” “One consequence of this new phase,” writes Meghnad Desai, “is that the state no longer controls the economy, but is one player (a major one of course) among many. The state has to adapt and adjust to forces which it cannot control but must respond to.”

    When working people or members of the middle class in affluent countries understandably but myopically lament the effects of capitalist globalization on their lives (all the while failing to appreciate the disastrous effects of such microeconomic policies as deregulation and privatization), they appear to outsiders looking in or those awaiting a seat at the table as a tad self-centered, unabashedly selfish or simply unrealistic insofar as they are forgetting, deliberately ignoring or unintentionally neglecting (a result, in part, of debilitating psychological mechanisms that go hand-in-hand with ideology construction and maintenance) the historic effects of earlier forms of globalization on far more vulnerable and poorer peoples on our planet: “colonization, force, pillage, slavery, slaughter of native [‘indigenous’] peoples, the targeted destruction of potential competitors, and a huge transfer of wealth into the rich countries.” This is not to deny the injustice of having their middle class lives (or the aspirations thereto) cut out from under them, but capitalist globalization is inexorably reducing “three worlds” to one, as millions around the globe are gaining at the expense of the middle classes in the affluent countries, and even if it is not, to be sure, the “one world” of principled or democratic cosmopolitans. Governments did not plan this, however much they have since capitulated to these economic forces: it is the predictable result of the global consolidation of turbo- and finance-capitalism, of the increasing power of transnational corporations. And while economic globalization has an upside in some parts of the world and has been responsible for a significant reduction in poverty (directly related to the economic downturn in the affluent countries), substantial local, regional, and international (both absolute and relative) inequality persists, indeed, it’s often growing, particularly within countries. Once more with Shaikh: “One could easily well argue that the inequality and lack of democracy on a global scale is abetted by the political institutions and interests of the ‘democracies’ of patrimonial capitalism.” But the power of these institutions and those interests is diminishing, hence the ascendance of xenophobic nationalism, right-wing populism, and fascist authoritarianism, all of which represent in part a (hopelessly misguided and) frantic and frightening attempt to regain the political powers that made for “national capitalism,” albeit sans any knowledge of the historical sources and sociological context of those powers. It is nostalgic fantasizing for a lost world, and its tenacious grip on mind of the masses (at least some of them), shaped and sharpened by the populist economic nationalists that seek to lead them, bodes ill for all of us.

    The Golden Age of capitalism for the “club of the advanced capitalist countries” is over (and with it, the ‘national capitalism’ that flourished during this period). Looking back with Desai: “The Keynesian quarter-century had indeed been a party. Everything had stayed high—employment, hours worked, vacancies—or grown steadily—income, wealth. The public sector—central government, local government, public enterprises—had grown without causing any problems.”

    We may look back, but there’s no turning back. And there is no golden-like age on the horizon, despite the contrary proclivities and desperate yearnings among those of us old enough to be intimately familiar with this history. In other words, Keynesianism, post- or otherwise, is behind us, at least in the long term and globally speaking (it was Keynes, after all, who ‘made capitalism safe for democracy’). The current conditions are, Desai provocatively suggests, “analogous to sailing a ship on high seas. The ship has some machinery for control, but in navigating it, the captain does not control the waves or the wind. These forces can be studied, but they cannot be controlled. The captain who ignores or defies these forces may well run the ship aground or sink altogether.” Put differently, “[c]ycles, with their mania, crashes, and panics” are here to stay, as they undoubtedly “are endemic to capitalism” (Desai). And yet it seems implausible if not reckless to speak of the “imminent collapse” of capitalism, given its staying power through and beyond the duration of these cycles: at present and in the near-term, there are only different types or versions of capitalism, some meaner and some more beneficent than others. One reality North Americans and Europeans are alike compelled to confront, in spite of recalcitrant ideological blinkers or blinders: the current phase of capitalist transformation and entrenchment is truly global. In the words of Desai,

    “The influence of capital—either as portfolio finance or as direct investment—the hegemony of financial markets, the increasing penetration of trade, have been experienced by all the worlds: First, Second, and Third. Indeed, this numerical categorization is now otiose. The benefits and costs of capitalism fall symmetrically—though not equally—on all parts of the world. For the first time in two hundred years, the cradle of capitalism—the metropolis, the core—has as much to fear from the rapidity of change as does the periphery.”

    It is this fear that has been canalized by the Right (and projected outward on ‘the Other’), its ideological and political project facilitated by a considerable number of working class voters punch-drunk on a cocktail of denial, self-deception, and wishful thinking. The fears, anxieties and anger of those workers in the (global) metropolis will not be assuaged, let alone overcome with the accelerated privatization of public goods, the deregulation of the finance sector, and the evisceration of remnant unionized workers.