In decline.

Photographer: Noel Celis/afp/getty images

There's Great News on Inequality and Poverty

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Many people on the left seem to believe that the global economy has the same problems as the economies of the U.S and Europe. For example, presidential candidate Bernie Sanders recently tweeted: “The global economy has simply failed when so many have so little and so few have so much.”

Sanders’ concern for the world’s poorest people is laudable. The task of saving humanity from deprivation is arguably the central quest of human history. But Sanders’ facts are a bit out of date. During the past two decades, the global economy has been great for the world’s poor. Across most of the developing world, the have-nots have a lot more than before.

The clearest evidence comes from two big facts: 1) the decline in world poverty, and 2) the fall in global inequality. These are recent developments -- the second is even more recent than the first. But they give us strong reason to believe that the global economy isn't broken at all, and in fact has never been healthier.

Oxford economist Max Roser has done a heroic job of cataloging and displaying the fall in poverty. Here, from his website, is a picture of how absolute poverty has declined:

The plunge isn’t an accident of measurement.

Nor is this just a story about China. Yes, that country has led the charge, with an industrialization bigger and faster than any in history that has lifted hundreds of millions out of poverty. But poverty rates have been falling in all regions of the world:

In South Asia, poverty has declined at an accelerating rate, and is down to a third of what it was in 1981. In Latin America, a quarter of the population was desperately poor in the early '80s -- now it’s just a little more than 5 percent. Even sub-Saharan Africa, a development laggard, has seen a substantial drop.

India, the world’s other super-giant country, hasn't performed as impressively as China, but its growth since 1980 has nonetheless been steady and impressive. India’s real per capita gross domestic product has more than quadrupled in the past 35 years:

During that time, India’s poverty rate has fallen steadily, showing that the gains haven’t just gone to the top layer of society. Some pooh-pooh India for failing to match China’s stellar performance, but this is a little like dismissing an National Basketball Association star for not being as good as Michael Jordan.

During this time, of course, population has been growing in many poor countries, so falling poverty rates don’t always translated into fewer people living at a subsistence level everywhere. But as Roser shows, the drop in rates has been so fast that the total numbers of desperately poor people are now falling as well:

Until recently, economic growth in poor countries wasn't enough to close the gap with rich countries. But in the last few decades, developing-world growth has accelerated while that of rich countries has slowed. As a result, global inequality is now falling. The most important and dramatic illustration of this comes from City University of New York economist Branko Milanovic. His now-famous “elephant graph,” created along with the World Bank’s Christopher Lakner, shows how income has grown for the world’s poor, middle-class and rich since the late 1980s:

This graph looks at people instead of countries. It shows that except for the very poorest people in the world -- whose countries are probably torn by wars, atrocities and corrupt dictatorships -- the people in the bottom and middle of the global income distribution have all experienced tremendous gains in recent decades. The rich have also gained, though the almost-rich -- corresponding to the middle classes in countries like the U.S., Japan and Europe -- have stagnated or lost out.

If you strip out top performer China, the pattern is only a little less dramatic. The message is clear -- after decades of losing relative ground in the early and mid-20th century, the poor are finally catching up across the globe.
QuickTake Income Inequality

Why is this happening? And why now? The clearest answer is that China, India, Southeast Asia and other poor, populous countries have finally started making the shift from agrarian economies to industrialized ones. That is the process that pulled Europe, Japan and the U.S. out of poverty in the Industrial Revolution, but for a long time other countries were unable to follow. At first, they were held down by imperial conquest, then by war, and finally by political problems during the difficult transition to a post-colonial world. Now that they’ve resolved their biggest political issues -- no more Great Leap Forward, Cultural Revolution, License Raj and other misguided social and economic experiments -- they are completing the journey toward first-world status. Trade and globalization also probably played a big role.

The rest of the developing world, including much of Latin America, Africa and the Middle East, has economies based on natural resource extraction -- oil, minerals and other commodities. It is generally accepted that it’s much harder for resource-based economies to industrialize -- this is known as the resource curse. Countries in Africa and Latin America were probably given a big second-hand boost in the 1970s, and again in the 2000s and early 2010s, by commodity demand from the industrializing giants. Now that China’s industrialization is nearing completion, that demand has slackened, and resource prices have collapsed. So we may now see a period of slow growth in Africa, Latin America and the Middle East, similar to what happened when commodities prices fell in the 1980s and 1990s.
QuickTake The Resource Curse

But the problem of the resource curse shouldn't blind us to the real, enormous, dramatic progress that has come with the industrialization of China, India and other poor countries. Thanks to the work of economists like Roser, Milanovic and the researchers at the World Bank, we know that the global economy isn't broken -- it’s doing exactly what we want it to do, which is to move great masses of human beings from the edge of starvation to a reasonably comfortable modern life. The global economy isn't the neoliberal, post-imperial dystopia that some on the left imagine it to be. Quite the opposite -- life on this planet has never been so good for so many people.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net