Much has been made recently about stagnating wages for the middle class and the growing gap between the rich and the rest in America. But that’s only one small part of the story.
Taking a step back and looking at the global picture, most of the growth in incomes since the turn of the century has gone not just to the world’s wealthiest citizens but to the rapidly rising middle classes in China, India and other emerging Asian economies, which have been the biggest beneficiaries of the historic globalization of the economy and expansion in world trade of the last two decades.
The biggest losers in the great global redistribution of income and trade since the fall of the Berlin Wall in 1989 have been the middle class and lower-income groups in the U.S., Japan and other developed countries. That is the conclusion of recent studies by the World Bank documenting the aftermath of the dramatic opening up of borders and trade since the collapse of communism in Eastern Europe and Russia, China’s entry into the World Trade Organization and other seminal events that have transformed the world economy in the last two decades.
World Bank researchers found that the average person in the middle of the income spectrum in China, for example, enjoyed a near-tripling of income between 1988 and 2008. Middle-income Thais and Indonesians nearly doubled their incomes, while India’s middle class saw income growth of about 50 percent in the same time period. The income of a typical middle-class worker in the U.S., by contrast, rose by only 26 percent, while a middle-class German’s wages grew by 7 percent and Japan’s middle-income workers actually lost ground in the same time period.
“Nine out of 10 of the winners were from resurgent Asia,” while “the losers were predominantly the people [in the developed world] who belong to the lower halves of national income distributions,” said Christoph Lakner, co-author of the studies and consultant at the World Bank.
Add in the enrichment of the wealthiest 5 percent of the world’s population from globalization, and it’s been “the most profound reshuffle of individual incomes on the global scale since the Industrial Revolution,” he said. The huge global shift of income and economic activity from the West to the East also raises “profound” political and social questions, he said.
“Does the growth of China and India take place on the back of the middle class in rich countries?” he asked. Although it’s difficult to prove that Asian workers are getting richer primarily because corporations shifted millions of jobs and billions of dollars in income to Asia while closing plants in the West in the last two decades, the trends almost certainly are related, he said.
A recent poll by Pew Research found that Americans are deeply skeptical about the benefits of foreign trade as a result of their experiences with job and income losses. More than half of those polled said that free trade destroyed jobs and lowered wages. But Pew found that views on free trade were much more positive in developing countries, which have benefited from the out-migration of jobs and incomes.
West to East
The shifting of income gains to Asian economies has gone so far, according to Mr. Lakner, that it has nearly enabled Asia to reclaim the prominent place in the world economy it enjoyed before the Industrial Revolution of the 1800s vaulted the West to predominance. Leading the resurgence of Asia has been China, whose rapid industrialization has lifted more than 600 million people out of abject poverty in the last two decades — an unprecedented feat in world history.
But Mr. Lakner said it’s hard to know whether to celebrate the success of Asia — formerly one of the poorest parts of the globe — or rue the slow hollowing out of the industrialized West, where middle-income citizens stand to keep losing more and more income in the competition with the emerging world for jobs in coming decades. He worries that the slow but steady decline of living standards for the middle class — even as the wealthiest 10 percent grows richer — poses a threat to democracy in the West.
Tyler Cowan, economics professor at George Mason University, said the studies by Mr. Lakner and co-author Branko Milanovic prove that freer trade, more open borders, greater immigration and other elements of globalization since the 1980s have succeeded at improving the living standards of large parts of the world’s population. To focus only on the increase in income and wealth disparities in the U.S. is to miss the point, he said.
“From a narrowly nationalist point of view, these developments may not be auspicious for the United States. But that narrow viewpoint is the main problem,” he said.
“The economic surges of China, India and some other nations have been among the most egalitarian developments in history,” he said. “International trade has drastically reduced poverty within developing nations, as evidenced by the export-led growth of China.”
The migration of Latin American and Asian job seekers to the U.S. and Eastern European and African job seekers to Western Europe also has helped build wealth in the developing world, even as it has put “modest pressure” on the wages of low-skilled native workers in the West who compete with the migrants, he said.
The availability of such plentiful, cheap labor clearly has benefited the owners of corporations and other rich people, even as it has presented competition for poorer Americans, he said. Still, the era of globalization overall has brought big benefits to the human race, he said.
Moreover, the rise of the middle class in China and other emerging countries adds to the pool of global consumers and presents businesses and workers in the West with opportunities for growth.
“Although significant economic problems remain, we have been living in equalizing times for the world — a change that has been largely for the good,” Mr. Cowan said. “Policies on immigration and free trade sometimes increase inequality within a nation yet can make the world a better place and often decrease inequality on the planet as a whole.”
Shift in wealth will grow
The Organization for Economic Cooperation and Development, which represents the world’s richest nations, recently predicted that the shift of income and economic power from the West to the East would continue and even intensify in coming decades.
By 2060 Asia and the rest of the emerging world in Africa and Latin America will constitute the largest part of the world economy, turning the current world order on its head, the group said.
As the emerging world gets richer, fewer migrants will seek to enter the U.S. and other developed nations looking for jobs. That will serve to further slow growth in the economy and labor force in Western nations, making it harder for them to increase living standards and service their large and growing debts, the OECD predicted.
The forces of globalization will continue to drive up income inequality within the U.S., as wealthier residents benefit more from increased access to cheap global labor and goods than less well-off residents, the OECD said.
World Bank President Jim Yong Kim said the rise of Asia has been both awe-inspiring and troublesome in its implications.
“In 1990 East Asia, South Asia and Africa all had the same percentage of people living in extreme poverty: 55 percent. Now East Asia is at 10 percent, and South Asia has gone down to 30 percent. In Africa it’s still 55 percent,” he said in a recent interview with Foreign Affairs magazine.
“The reality of global market capitalism is with us. The Chinese Communist Party and the Vietnamese Communist Party embraced global market capitalism fully,” and the results are now in: They’ve grown richer and more powerful, he said.
“The world has changed. Even very poor people are more empowered and demanding more. This is happening everywhere,” he said, noting that the dramatic growth in incomes and living standards in emerging countries increasingly is not enough to satisfy their growing middle class, which also wants political liberties and greater equality.
“Even in places like Brazil, where the last two governments have been so committed to reducing inequality, there were protests last summer. It’s just a political reality for leaders that they’ve got to pay attention to inequality,” Mr. Kim said.