Get Ready to See This Globalization 'Elephant Chart' Over and Over Again
Globalization was the driving force behind the growth miracle in emerging markets, lifting millions of people out of poverty over the past few decades.
Now, a backlash against how the global income pie has been divided up is increasingly influencing the political affairs of developed markets.
A chart first published in a 2012 World Bank working paper by Economist Branko Milanovic details which segments of the global population saw a rise in real incomes from 1988 to 2008:
Globalization constituted a massive labor supply shock, allowing corporations to tap cheaper workers. The benefit to consumers in advanced economies took the form of downward price pressures on these goods. Along the way, however, the middle classes in developed nations failed to see this rising tide lift their boats.
"The biggest losers (other than the very poorest 5 percent), or at least the 'non-winners,' of globalization were those between the 75th and 90th percentiles of the global income distribution whose real income gains were essentially nil," according to Milanovic. "These people, who may be called a global upper-middle class, include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated."
Toby Nangle, co-head of asset allocation at Columbia Threadneedle Asset Management, called this "globalization as an elephant" visual, "the most powerful chart of the last decade."
This chart is now making the rounds on Wall Street as strategists search for an economic rationalization of the British referendum vote, the success of U.S. populists, and the rise of separatist movements in Europe, many of which are isolationist in nature.
"We equate the same malaise in the U.K. with that in the U.S. as well as the rest of Europe, reflected in the populist leanings of the electorate," writes Deutsche Bank AG's Global Head of Rates Research Dominic Konstam. "This calls for a radical policy rethink from the established political class and, at this stage, there are limited options but all of them have one thing in common: the need to redistribute spending power from those that have to those that have less."
The fact that this narrative has spread to these corners, rather than being confined to the left side of the political spectrum, is itself noteworthy, according to Duncan Weldon, Resolution Group's head of research.
"When people like Deutsche Bank are starting to say, 'maybe capitalism needs a form of reinvention,' maybe that's the time to start listening to that," he said during an interview on BloombergTV. "It's not Bernie Sanders; it's a global investment bank."
The easy access to credit prior to the collapse of the U.S. housing market helped paper over the angst stemming from this unequal distribution of income in the western world, Weldon said, but the extent of the problem has been laid bare in the aftermath of the crisis.
Strategists at Bank of America Merrill Lynch echoed Konstam's words in a note yesterday, calling Brexit a harbinger of a move towards more insular stances by governments in advanced economies — and referenced Milanovic's chart to bolster their case.
"While globalization, immigration and the free market have strong support from the winners of these themes – the plutonomists and the highly educated, in our view they seem to have underestimated the frustration of developed market middle and working classes," write Equity Strategists Ajay Singh Kapur and Ritesh Samadhiya. "We think Brexit could just be the first surprise in a re-calibration of the world away from globalization towards more inward looking policymaking. Away from Wall Street and more towards Main Street. Away from financial asset reflation to more income support and wage inflation."
Conor Sen, portfolio manager at New River Investments, placed the proliferation of this chart (and the associated focus on those who've lost out from globalization) on a continuum with other narratives that have captured popular attention since the financial crisis.
Reinhart and Rogoff brought a focus to government debt burdens that lent support to austerity movements; Piketty, meanwhile, suggested that inequality was destined to get worse because the rate of return on capital is higher than economic growth.
"What's now captured the interest of intellectuals is the elephant chart, the idea that over the past 30 years the winners were emerging market middle classes and the 1 percent in developed markets, but the developed markets' middle classes were stagnant," he wrote. "And I think we've finally found the correct framework for thinking about intersection of politics and macroeconomic trends."