ASIA
26 March 2014
An Emerging Middle Class
An excellent piece on the world's emerging middle class by Mario Pezzini, director of the OECD Development Centre, provides a nice complement to our article on Asia's middle class.
The increase in average incomes and the fall in levels of absolute poverty, in particular during the last decade, suggest that an increasing proportion of the world’s population is neither rich nor poor by national standards but finds itself in the middle of the income distribution.
In 2009 the middle class included 1.8 billion people, with Europe (664 million), Asia (525 million) North America (338 million) accounting for the highest number of people belonging to this group. Even in Africa, where middle class’s growth has not been very robust, it has nonetheless been noticeable and contributed to increased domestic consumption in many countries. Sales of refrigerators, television sets, mobile phones, motors and automobiles have surged in virtually every African country in recent years. Possession of cars and motor cycles in Ghana, for example, has increased by 81% since 2006.
This expansion continues. The size of the “global middle class” will increase from 1.8 billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. The bulk of this growth will come from Asia: by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption, compared to 28% and 23%, respectively in 2009.
The developing world’s “emerging middle class” is a critical economic and social actor because of its potential as an engine of growth, particularly in the largest developing countries such as China and India but also in sub-Saharan Africa. History tells us that those in the middle have in the past vigorously accumulated capital, be it physical (plant, equipment or housing) or human (education or health). Consolidating this incipient middle income group into a stable middle class could provide a solid foundation for economic progress by driving consumption and domestic demand.
When contrasting the experience of Brazil and Korea, this becomes evident. In the 1960s the countries had similar income levels and rates of growth; by the 1980s, however, due to high inequality in Brazil, the middle class made up only 29% of the population, in contrast to Korea’s 53%. Its middle class enabled Korea to shift away from exportdriven growth towards domestic consumption, a transition that did not occur in Brazil. Today, this opportunity presents itself to Brazil. Thanks to a decrease in poverty from almost 40% of the population in 2001 to around 25% in 2009, 31 million people joined the middle class in Brazil. Today 52% of Brazil’s population is middle class.
But middle classes are not only a motor of consumption and domestic demand, their social role remains equally important. Middle classes are believed to support democracy and progressive but moderate political platforms. Strong middle classes can influence economic development through more active participation in the political process, expressing support for political programs and electoral platforms, in particular those that promote inclusive growth.
Despite having incomes which are above international or even national poverty lines, middle classes in many cases remain vulnerable. Their employment (many work in the informal sector), education (few have university degrees) and consumer behaviour do not coincide with perceptions of a middle class that drives domestic consumption and growth. For instance, in Bolivia, Brazil, Chile and Mexico there are up to 44 million informal middle-class workers, more than 60% of the total middle-class working population of 72 million. Not surprisingly, social protection systems fail to reach even half of this population, as coverage rates of informal workers are extremely limited: below 15% in Brazil, Chile and Mexico, and almost negligible in Bolivia.
This middle class is unlike that which became the engine of development in many OECD countries.
The susceptibility of emerging non-poor populations in Africa is even more striking. Depite the upward trend, with a growing middle class, ownership of durable goods such as passenger cars remains a rarity. Even in economies like Mauritius or South Africa where durable goods ownership has grown considerably, less than one-fifth of households have passenger cars.
This vulnerability is especially worrying, since if those in the middle have precarious incomes and unstable employment, their consumption cannot be counted upon to drive national development, nor can their growth be taken as a sign of social progress. What is more, their political preferences may veer towards populist platforms not necessarily conducive to good economic management.
Middle class expectations in emerging and developing countries are rising and evolving as their countries’ economic situations improve, following Hirschman’s “tunnel effect”. They are no longer satisfied with simply having access to public services; they are increasingly concerned with their quality. Providing the quality services that the middle class demands is far more complicated than simply providing access to them and can be a source of friction, conflicts and political upheaval.
We have the recent example of Chile. After decades of high economic growth, Chile has become an international player with a competitive economy. Yet in the second half of 2011, students and others staged massive protests against the government, demanding greater access to high-quality, inexpensive education. They are no longer satisfied with having access to education. They want cheaper and better education, which is much harder to deliver. As the demand for public services is soaring, the capacity of the government to respond to these demands is expanding too, but at a slower rate.
Since middle classes remain vulnerable, they are dissatisfied with state services. Governments should put policies in place to fight the vulnerabilities in order to benefit from middle class support. Policies should promote upward social mobility, such as education, and provide safety nets that protect the most vulnerable segments when facing life risks (unemployment, old age, disability, parenthood).
If publicly provided services are of high quality, a constituency for comprehensive social protection systems can be built thanks to the middle class, that can participate in contribution-based systems. If publicly-provided services are of low quality, then those in the middle are more likely to consider themselves losers in the fiscal bargain and are less willing to finance the public sector.
While the middle class is rapidly expanding in emerging and developing countries, in rich countries it is shrinking and feels incapable of defending the standards of living that have characterised a middle-class lifestyle for centuries. England, Israel and Spain are just a few examples of countries where people take to the streets protesting a situation that for many has become unbearable. Middle and working classes have been carrying too much of the burden of the economic crisis; there has been a shift in wealth and income from them to the wealthier groups of society that is no longer acceptable.
The rising expectations of the expanding middle class in developing countries contrast with the stagnating living standards of a shrinking middle class in OECD countries. Today both middle classes are awakening. Each with its own specificities, will these middle classes be agents of change?
This article was originally published in the OECD Yearbook 2012.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
In 2009 the middle class included 1.8 billion people, with Europe (664 million), Asia (525 million) North America (338 million) accounting for the highest number of people belonging to this group. Even in Africa, where middle class’s growth has not been very robust, it has nonetheless been noticeable and contributed to increased domestic consumption in many countries. Sales of refrigerators, television sets, mobile phones, motors and automobiles have surged in virtually every African country in recent years. Possession of cars and motor cycles in Ghana, for example, has increased by 81% since 2006.
This expansion continues. The size of the “global middle class” will increase from 1.8 billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. The bulk of this growth will come from Asia: by 2030 Asia will represent 66% of the global middle-class population and 59% of middle-class consumption, compared to 28% and 23%, respectively in 2009.
The developing world’s “emerging middle class” is a critical economic and social actor because of its potential as an engine of growth, particularly in the largest developing countries such as China and India but also in sub-Saharan Africa. History tells us that those in the middle have in the past vigorously accumulated capital, be it physical (plant, equipment or housing) or human (education or health). Consolidating this incipient middle income group into a stable middle class could provide a solid foundation for economic progress by driving consumption and domestic demand.
When contrasting the experience of Brazil and Korea, this becomes evident. In the 1960s the countries had similar income levels and rates of growth; by the 1980s, however, due to high inequality in Brazil, the middle class made up only 29% of the population, in contrast to Korea’s 53%. Its middle class enabled Korea to shift away from exportdriven growth towards domestic consumption, a transition that did not occur in Brazil. Today, this opportunity presents itself to Brazil. Thanks to a decrease in poverty from almost 40% of the population in 2001 to around 25% in 2009, 31 million people joined the middle class in Brazil. Today 52% of Brazil’s population is middle class.
But middle classes are not only a motor of consumption and domestic demand, their social role remains equally important. Middle classes are believed to support democracy and progressive but moderate political platforms. Strong middle classes can influence economic development through more active participation in the political process, expressing support for political programs and electoral platforms, in particular those that promote inclusive growth.
Despite having incomes which are above international or even national poverty lines, middle classes in many cases remain vulnerable. Their employment (many work in the informal sector), education (few have university degrees) and consumer behaviour do not coincide with perceptions of a middle class that drives domestic consumption and growth. For instance, in Bolivia, Brazil, Chile and Mexico there are up to 44 million informal middle-class workers, more than 60% of the total middle-class working population of 72 million. Not surprisingly, social protection systems fail to reach even half of this population, as coverage rates of informal workers are extremely limited: below 15% in Brazil, Chile and Mexico, and almost negligible in Bolivia.
This middle class is unlike that which became the engine of development in many OECD countries.
The susceptibility of emerging non-poor populations in Africa is even more striking. Depite the upward trend, with a growing middle class, ownership of durable goods such as passenger cars remains a rarity. Even in economies like Mauritius or South Africa where durable goods ownership has grown considerably, less than one-fifth of households have passenger cars.
This vulnerability is especially worrying, since if those in the middle have precarious incomes and unstable employment, their consumption cannot be counted upon to drive national development, nor can their growth be taken as a sign of social progress. What is more, their political preferences may veer towards populist platforms not necessarily conducive to good economic management.
Middle class expectations in emerging and developing countries are rising and evolving as their countries’ economic situations improve, following Hirschman’s “tunnel effect”. They are no longer satisfied with simply having access to public services; they are increasingly concerned with their quality. Providing the quality services that the middle class demands is far more complicated than simply providing access to them and can be a source of friction, conflicts and political upheaval.
We have the recent example of Chile. After decades of high economic growth, Chile has become an international player with a competitive economy. Yet in the second half of 2011, students and others staged massive protests against the government, demanding greater access to high-quality, inexpensive education. They are no longer satisfied with having access to education. They want cheaper and better education, which is much harder to deliver. As the demand for public services is soaring, the capacity of the government to respond to these demands is expanding too, but at a slower rate.
Since middle classes remain vulnerable, they are dissatisfied with state services. Governments should put policies in place to fight the vulnerabilities in order to benefit from middle class support. Policies should promote upward social mobility, such as education, and provide safety nets that protect the most vulnerable segments when facing life risks (unemployment, old age, disability, parenthood).
If publicly provided services are of high quality, a constituency for comprehensive social protection systems can be built thanks to the middle class, that can participate in contribution-based systems. If publicly-provided services are of low quality, then those in the middle are more likely to consider themselves losers in the fiscal bargain and are less willing to finance the public sector.
While the middle class is rapidly expanding in emerging and developing countries, in rich countries it is shrinking and feels incapable of defending the standards of living that have characterised a middle-class lifestyle for centuries. England, Israel and Spain are just a few examples of countries where people take to the streets protesting a situation that for many has become unbearable. Middle and working classes have been carrying too much of the burden of the economic crisis; there has been a shift in wealth and income from them to the wealthier groups of society that is no longer acceptable.
The rising expectations of the expanding middle class in developing countries contrast with the stagnating living standards of a shrinking middle class in OECD countries. Today both middle classes are awakening. Each with its own specificities, will these middle classes be agents of change?
This article was originally published in the OECD Yearbook 2012.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com
REFERENCES:
- AfDB (2011), “The Middle of the Pyramid: Dynamics of the Middle Class in Africa”, Market Brief, 20 April.- OECD (2011), Latin American Economic Outlook 2011: How Middle Class is Latin America?, OECD Publishing.
- OECD (2011), Perspectives on Global Development: Social Cohesion in a Shifting World, OECD Publishing.
- Mario Pezzini. An Emerging Middle Class. OECD Observer. OECD Yearbook 2012.