In my previous blog, I came to the defense of my fellow economists – who repeatedly take flak for not anticipating the global financial meltdown in 2008 or missing key signposts pointing toward the current rise of anti-globalization around the world.
I used that opportunity to explore the notion that, while there is certainly room for criticism, it is unfair to brand many economic polices that economists have supported as "bad deals" (a chief example being trade liberalization) by simply focusing on their negative elements, lest we risk "throwing the baby out with the bathwater."
Here I will bolster this defense by calling our attention to a global perspective on the middle class. Often, in the current debate about the uncertain situation of the middle class, or the stagnation of income for the median earner, one overlooks the geographic focus of the debate. This debate is ongoing, with few exceptions, in high-income countries. However, from a global perspective, the middle class is in very good health.
I was reminded by Eric Hazan at a recent conference that a very large number of people has joined the global middle class in recent decades, and most of them are from developing countries.
As illustrated by the Lakner-Milanovic elephant graph, this global success is due to the strong growth that people in developing countries have experienced over the last three decades - especially (but not exclusively) in China, India, and other large countries.
And there is also more to the story.
Around the year 2000, most members of the global middle class in developing countries were earning incomes far above the average salary of their respective countries. In fact, most of them belonged to the top 20 percent in their own countries. But this has changed and, most likely, will continue to change rapidly. Some calculations we did show that, by 2030, about half of the global middle class in developing countries will be found amongst the middle of their own country distribution. This means that they will live in truly middle class societies.
From a global perspective, these changes in the middle class are mirrored by the progress achieved in the reduction of global poverty. The number of poor people across the globe has come down - from close to 2 billion (or 35 percent of the world population) in 1990 to less than 800 million (or about 11 percent of the world population) in 2013.
In contrast, however, those representing the middle class in high-income countries have not enjoyed the same progress (this is, of course, a generalization and individual countries have followed different paths; see Stefano Scarpetta’s intervention for more details). This perception of slow or no progress does not seem to be curbed by the fact that consumers have enjoyed access to cheaper goods imported from China and other developing countries.
Just how important global trade expansion has been in driving growth for developing countries - while simultaneously moderating wages and employment opportunities for workers in high-income countries (especially those with lower education) - is still up for debate.
The backlash against globalization, however, is undeniable.
Many times since the term was first coined in 1989, the "Washington Consensus" has made recommendations that have been strongly criticized - especially its stance on liberalizing trade. However, perhaps for the first time, the primary criticism against this stance is not originating in Latin America or other developing parts of the globe but, rather, from more developed, Western economies.
Acknowledging and addressing the costs of globalization is absolutely crucial (watch out the forthcoming third blog in this series!) No less important, however, is the task of mitigating the all-too-real risk that, rather than complementing the Washington Consensus with a set of country-specific policies supporting equal access and opportunity, governments may instead choose to completely scrap it.
If we ignore the global gains made in poverty reduction and increased participation of developing countries in the global middle class over the last few decades, in the face of rising discontent and anti-globalization sentiments, we run the risk of undoing this important progress.
In the end, a new global equilibrium, where countries trade less with each other and cooperate less will only create a situation where everyone is worse off in the long run.
- Europe and Central Asia