Monday, August 1, 2016

The "other" Branko Milanovic graph

Much has been written about this graph on cumulative real income growth between 1988 and 2008 at various percentiles of the global income distribution.
Milanovic has an article in Vox which tries to interpret this graphic to explain the recent social and political turmoil in US and Europe. Nine out of ten people at around the global median income (45th to 65th percentile) are from Asian countries and seven out of ten people at around point B (70-85th percentile) are from lower half of income distribution of the developed economies.
The contrast between the unambiguous success of people at point A and the relative failure of people at point B allows us to look at the effects of globalisation more broadly. Not only can we see them more clearly when thus juxtaposed, but it enables us to ask whether the two points are in some sense related: is the absence of growth among lower middle classes of the rich world the ‘cost’ paid for the high income gains of the national middle classes in Asia? It is unlikely that one can provide a definitive answer to that question, since establishing causality between such complex phenomena that are also affected by a host of other variables is very difficult and perhaps impossible. However, the temporal coincidence of the two developments and the plausible narratives linking them, whether made by economists or by politicians, make the correlation in many people’s mind appear real.
The symmetry in the graph (between A and B) leads us to think about this conclusion. But this graph only measures income growth percentages among percentiles and the symmetry is therefore deceptive. Instead, imagine if we have another graph that measures the absolute real income gains across percentiles. Consider this possibility (it is completely fictitious and off the hat, but most plausible).
Now this graph would go against the earlier narrative and present another symmetry - between the top 5% in developed economies and their own lower half of income distribution. Given their very low baseline incomes, the absolute gains at various percentiles of income in the developing countries would be smaller, even when compared with low percentage percapita increases at each percentile of income in developed countries. 

This would anchor the debate around a different locus - the structural causes for concentration of income at the top. It would take us back to the narrative about widening inequality due to institutionalized forces - loss of bargaining power for labor, institutional and regulatory capture, skill-biased technical change, excessive financialization, and so on, that are in play across developed economies. After all, while corporate profits and returns to capital have risen sharply in these countries over the past quarter century, and even labor productivity has risen, labor incomes have largely remained stagnant.

The framing of such debates are critical, especially in a world where information and analysis is both plentiful and cheap. It is therefore important that public intellectuals make efforts to present all sides of the debate. Intellectuals need to be cognizant of their culpability in fueling populist anger. In my opinion, Professor Milanovic should not have had his percentage graphic out without the other one.

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