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The Decline of Global Inequality in the 21st Century: Reconsidering the Industrial Transformation Thesis1

Global inequality declined substantially after 2000, reversing a two-century-long trend of rising inequality. While conventional explanations attribute this decline to industrialization in poor nations aided by economic globalization, this industrial transformation thesis has not been empirically scrutinized. The author uses counterfactual simulation exercises and sectoral macroeconomic data to examine the factors driving income growth in the poor countries most responsible for declining between-country inequality since 2000. His findings contradict the industrial transformation thesis. First, a substantial portion of inequality decline has resulted from slower growth in rich nations. Second, he finds that past literature has overstated the role of the globalized manufacturing sector in reducing inequality. Apart from China, the poor nations that contributed most to inequality decline have not seen shifts toward manufacturing in terms of output, employment, or their export profile. The author situates these findings in the global inequality literature and discusses their implications for the future trajectory of global inequality.