A Better Job Adjusting

The winners and losers of globalization has been an especially popular news headline in the last year or two. Much can be made of whether or not globalization per se is the culprit of the shrinking middle classes of the U.S. and other advanced economies, and the rising middle classes of China and other developing economies.

The pace and ease in which technology spreads to a wide range of industries, national tax and regulatory policies, rates of investment, demographics, social policies, infrastructure investment, education – the list goes on and on – all contribute to the performance of an economy and are all inter-related. Increased economic inter-connectedness can shift some economic activity from one part of the world to another, indeed creating some who lost opportunities and others who gained opportunities – winners and losers, but the story does not end there.

Economic dynamism and smart policies can yield new opportunities in an economic pie that is larger on aggregate. How well we adjust to changes in economies (what goods and services are being produced and where, for example) and how effectively we support inclusive and sustained growth is the real question.

Looking back at the period from 1988 to 2008 gives us somewhat of an idea on how well we have adjusted.

Economist Branko Milanovic has created what Paul Krugman referred to as “recent history in one chart“. Instead of comparing changes in income inequality by country, he looked at the whole world as one country. By looking at the global income distribution, he calculated the changes in income from 1988 to 2008 for each income group around the world. The chart confirms an important narrative: The winners have been the ultra rich (C) and the middle classes in China, India and other developing countries (A). The losers have been the ultra poor (D) and the middle classes in the U.S. and other developed economies (B).

We need to do a better job adjusting. Adjusting to the greatest reshuffle of individual incomes since the Industrial Revolution, however, is not an easy task. Smarter fiscal policy and serious investments in infrastructure and education are the best places to start.

Milanovic

 

 

 

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