Global Income Inequality and the Great Reshuffle: A Deeper Look at Economic Data

This lecture delves into the complexities of global income inequality, challenging simplistic narratives of universal progress by demonstrating how different analytical approaches yield vastly different conclusions. Initially, the speaker presents data showing a dramatic increase in average global GDP per capita since 1820 and a convergence of country-level incomes, suggesting a world that is becoming richer and more equal. However, by shifting the perspective to compare current national incomes against historical top-income countries (e.g., Australia two centuries ago, UK one century ago, US 50 years ago), a more 'melancholy' picture emerges: a significant portion of the world's population (up to 85%) lives in countries economically decades or even centuries behind the contemporary rich world's standards, highlighting a profound heterogeneity often obscured by averages.

The core of the discussion revolves around the 'great reshuffle' of individual incomes since the Industrial Revolution, primarily driven by the rise of Asia. This phenomenon involves a significant shift in relative global income positions, where the burgeoning middle classes of Asian countries are moving up the global income distribution, displacing individuals in richer Western nations downwards in relative terms, even if their absolute incomes are still increasing. This reshuffling has profound implications for consumption patterns and perceived living standards in rich countries, as their 'middle class' may find their global positional ranking, and thus their purchasing power for certain goods and services, diminished over time.

The lecture identifies the period between 1978 and 1991 as 'watershed years,' marked by pivotal policy shifts globally, including China's economic reforms, the rise of neoliberalism in the US and UK, Mitterrand's policy reversal in France, the fall of the Soviet Union, and India's liberalization. These changes collectively transformed the economic regimes for over 60% of the world's population, setting the stage for the current global income distribution. The speaker illustrates this with the 'elephant graph,' which visually depicts who gained and who lost in relative income terms during the globalization period (1988-2008), showing significant gains for the global middle class (largely Asia) and the global top 1%, while the lower-middle classes of rich Western countries saw minimal relative gains.

Finally, the analysis distinguishes between relative and absolute income gains. While the elephant graph highlights substantial *relative* gains for the Asian middle class and the global top 1%, translating these into *absolute* gains reveals that the lion's share (around 44%) of the total incremental income generated between 1988 and 2008 went to the global top 5%. This distinction underscores that the choice of metric profoundly influences the narrative of global economic progress and inequality. The speaker concludes by outlining two broad policy options for rich countries facing stagnant middle-class incomes: either attempting to alter the rules of globalization to slow the growth of emerging economies or implementing domestic redistribution policies to reduce inequality within their own nation-states.

"The world is definitely getting better but if you use very same data but you just decide to actually ask the questions little bit differently you might have a very different answer."

"When you add all of that you actually have eighty-five percent of people in the world who live in countries that are between fifty one say fifty years one century or even two century behind what we consider like in the rich world."

"What we are witnessing now is almost certainly the greatest reshuffle of individual income since the Industrial Revolution."

"Even if individuals in the West who are not actually getting worse off but maybe even getting better off by half a percent or 1 percent per year they will be displaced so instead of being for example a the 80th percentile I will become under 79 percentile."

"These are the years that actually have produced this beginning of this great reshuffle of income and beginning of the catch-up of Asian countries but the watershed years were really the period in 1978 and 1991."

"Now the first thing to notice first the world income distribution does look nowadays more similar to income distributions for individual countries because the shape of that income distribution is log normal."

"The elephant graph... essentially shows with numbers what many of us knew through intuition in other words who really gained a lot and who'd gained less during the globalization period."

"The alternative to that approach is to leave globalization cities but to say I want to implement policies which would release tribute income or slow down the income growth of the top 1%."