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The global top 1 percent earned twice as much as the bottom 50 percent in recent years

It’s bad!

Behold, the “elephant chart.” It’s one of the most famous charts in economics of the past decade, one that aims to summarize the state of the world economy in the post-Cold War era:

Elephant chart Graph by Branko Milanovic/Christoph Lakner; elephant added by Caroline Freund

Using World Bank data from researchers Christoph Lakner and Branko Milanovic, the chart shows how each part of the world’s income distribution fared from 1988 to 2008. There are two big winners: the global middle class, in particular people in East Asia (especially China) and South Asia (especially India), and some parts of sub-Saharan Africa who’ve escaped extreme poverty in recent decades; and the ultrarich, who are overwhelmingly concentrated in rich countries in Europe or North America.

By contrast, people from the 80th-90th percentiles of the distribution experienced sluggish growth, if any, and the absolute poorest people didn’t see incomes grow as fast as their slightly richer neighbors.

The elephant chart went viral after Lakner and Milanovic first published it in a working paper back in 2013 (here’s the published version). There’s been some debate about whom, exactly, the dip at the 80th-90th percentiles represents — Lakner and Milanovic argue it includes many lower- and middle-class people in rich countries like the US and Germany, while others argue it’s mostly showing a stagnant Japan and struggling post-Soviet economies — but the broad implication, that the bulk of humanity and the top 1 percent both gained while a somewhat richer cluster fell behind, is clear and powerful.

The data for the chart stops at 2008. But a team of economists — led by Facundo Alvaredo, Lucas Chancel, and famous inequality research trio Thomas Piketty, Emmanuel Saez, and Gabriel Zucman — recently unveiled the 2018 World Inequality Report, which extends the data to 2016. They replicated the elephant chart.

Only it doesn’t look like an elephant anymore:

The new elephant graph, using latest 2018 data World Inequality Report 2018

In this version, the trunk reaches much higher and the elephant’s head is much smaller. The rich see much higher income growth, which comparatively swamps that of residents in poor countries. Poor residents in developing countries still gain, but their growth looks dismal compared to that of the global top 1, 0.1, 0.01, and even 0.001 percent. Indeed, they find that the global top 1 percent captured twice as much growth as the bottom 50 percent from 1980 to 2016.

To borrow a quip from the Center for Global Development’s Justin Sandefur, the new chart looks more like the Loch Ness monster than like an elephant:

Loch Ness Monster growth CGD / Justin Sandefur

So what accounts for these differences? Why does the latest version of the chart look so much bleaker, with comparatively little income growth for the bottom half of the distribution and much more for the top 1 percent?

Different dates: The original elephant chart included the years 1988 to 2008, encompassing only 20 years, while the new one encompasses 36, from 1980 to 2016. As such, it includes the Great Recession and subsequent recovery, as well as the bulk of the 1980s, when China’s economic rise began in earnest.

But if anything, you might expect that to make the chart less favorable to the uber-rich (who lost heavily in the Great Recession) and more favorable to the bottom 50 percent (as emerging economies like India, China, and Brazil proved recession-proof).

Different data sources: The original Lakner-Milanovic elephant chart is based exclusively on World Bank survey data. That data is voluminous, covering 565 total surveys across five different collection years, with responses all converted (while adjusting for purchasing power) to 2005 dollars.

The new World Inequality Report chart relies much more heavily on administrative data, in particular income tax records. The researchers argue that those records offer a more accurate picture of the income distribution in many countries, particularly among the richest citizens.

This could help explain the relatively high top-end income growth found in the World Inequality Report. “For example, according to Brazilian survey data, inequality in the country decreased between 2001 and 2015,” the authors explain, “but income tax data show that, in fact, inequality remained stubbornly high over this period.”

That being said, the World inequality Report also includes survey data where necessary to measure forms of income, like health benefits, that don’t show up on tax returns.

Different income definitions: The original elephant chart relied on surveys asking about either income or consumption, which were used interchangeably. The World Inequality Report, by contrast, uses an approach called “distributive national accounts,” in which every dollar of a country’s national income is accounted for and attributed to an adult in the country.

If you combine the gross income or spending of everyone in a country as measured by a survey, and add it all up, you’ll still be far short of the country’s gross national income (GNI — like GDP but excluding imports and exports). That’s because you’re still ignoring stuff like profits retained in companies, money in foundations and nonprofits, “imputed rent” (the rent that owners of houses and apartments don’t have to pay because they own their residence), and so forth.

The World Inequality Report is designed so that if you add up all the income assigned to each resident of the country, it does total the country’s GNI, so all those parts of the economy are accounted for.

The big picture: high-end inequality is growing and global poverty is falling

The new elephant chart is an extremely powerful illustration of just how sharply the incomes of the world’s richest people have grown in recent decades, and how much faster they’ve grown than everyone else’s.

That’s been a major theme in the work of Piketty and Saez for a decade and a half now, and this work by them and their collaborators is no exception. It’s vulnerable to the same critiques about faulty distributional assumptions that have been levied against their own work on distributing national income (see this piece for more on that), but the data is solid and backed by voluminous tax records, and it represents one of the most complete and exhaustive documentations of the global income distribution yet completed.

At the same time, the slower growth of the bottom half of the distribution relative to the top 1 percent can risk obscuring an important fact: In absolute terms, the bottom half of the world’s income distribution has been gaining tremendously:

Extreme poverty’s decline, by region
Extreme poverty’s decline, by region.
Our World in Data

The above chart, from Our World in Data, shows the decline in extreme poverty (defined on living on less than $1.90 per person per day) in all the major regions of the world, from 1987 to 2013. It is based on World Bank survey data, with all the limitations that come with that.

But it backs up a fact that’s widely accepted by development economists but has yet to really penetrate the popular consciousness: Extreme poverty is being eliminated. If growth speeds up a bit and developing countries commit to redistributive programs to help the poor, we could conceivably eliminate it by 2030. That’s not the end of the struggle by any means (living on $2 a day is still extremely bad, even if it’s better than living on only $1.50), but it’s a tremendous achievement. And as the above chart shows, it’s not an achievement that’s going to be reached solely through supercharged growth in China and India. Even in sub-Saharan Africa, poverty rates have fallen steadily, and might be falling faster now.

The new elephant curve, depressing as it is, does not debunk that fact. We’re making tremendous strides against the worst forms of poverty on the planet. What the elephant curve should make us wonder instead is if we could do even better if governments were better able to harness the tremendous growth in top incomes to help the global poor. That’s a difficult challenge — the global poor tend to live in different countries than the global rich — but hardly impossible. More aggressive redistribution could hasten the end of extreme poverty, and make the elephant chart a little more elephant-like again.