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Trade and globalisation have been unfairly blamed for Brexit and the rise of Donald Trump, according to a study of incomes that debunks the popular view that a more connected world has led to stagnating fortunes for the lower middle class in rich countries.
The idea that ordinary people have been unfairly hit by the rise of emerging markets and China over the past 30 years and the income gains of the global super-rich was propagated by the so-called “elephant chart” devised by the economist Branko Milanovic, a former senior official at the World Bank.
Development experts celebrated the graph as the “chart that explains the world”. But a new study by the Resolution Foundation, a British charity founded to support the interests of those on low to middle incomes, has overturned its findings.
After a detailed replication of the global incomes data provided by Mr Milanovic, the Resolution Foundation analysis challenges the conclusion that globalisation and trade harms the middle classes of rich countries.
A separate update by Mr Milanovic to the data from 2008 to 2011 also suggests greater income growth among precisely the groups hurt by stagnating incomes in the previous 30 years and much less gain for people with the top 1 per cent of global incomes, Mr Milanovic said in an interview. His update also demonstrated the world’s wealthy took a significant hit in the global financial crisis, which had actually served to narrow inequality.
“You can say the crisis was good for [reducing] inequality,” he told the Financial Times.
The Resolution Foundation found that faster population growth in emerging markets made it difficult to compare the incomes of the lower middle classes over time because their position in global income rankings changed. The larger number of Chinese families made it appear that the US poor were further up the global income scale in 2008 than they were in 1988.
If incomes were unchanged in every country, this population effect alone would lead to apparent drops of 25 per cent in parts of the global income scale associated with poorer people in rich countries. That generated the characteristic “elephant” shape, according to the Resolution Foundation.
These results were exacerbated by outlying factors, such as the former Soviet states of eastern Europe, which had incomes in the same zone and saw them collapse after the fall of communism.
Adjusting the chart for constant populations and removing China, ex-Soviet states and Japan shows a relatively even spread of income growth across the world. China is a clear outlier in performing very strongly.
“Globalisation is not to blame for all the ills of the world,” Torsten Bell, director of the Resolution Foundation, said. “Although globalisation brings a range of challenges for lower income families, we need to be clear that weak income growth generally is rooted in domestic policy, and blaming globalisation takes the pressure off governments.”
The Resolution Foundation’s analysis suggests that the fate of lower middle class incomes has differed greatly country by country, and even with a rise in inequality in many places the rich world’s lower middle classes have not fared badly.
Mr Milanovic has pioneered research into income comparisons on a global scale and says “the great winners [of the globalisation process] have been the Asian poor and middle classes”.