The rise of the global middle class

 
Car dealership in India

The United Nations describes it as a historic shift not seen for 150 years.

The new global middle class in China, India and Brazil have propelled their economies to equal the size of the industrialised G7 countries. By 2050, they are forecast to account for nearly half of world output, far surpassing the G7.

Plus, within a decade, the middle class in Europe and North America will be less than a third of the world's total, down from more than half now.

The Brookings Institution estimates that there are 1.8 billion in the middle class, which will grow to 3.2 billion by the end of the decade.

Brookings Institution figures

Asia is almost entirely responsible for this growth. Its middle class is forecast to triple to 1.7 billion by 2020.

By 2030, Asia will be the home of 3 billion middle class people. It would be 10 times more than North America and five times more than Europe.

There is also substantial growth in the rest of the emerging world. The middle class in Latin America is expected to grow from 181 million to 313 million by 2030, led by Brazil. And in Africa and the Middle East, it is projected to more than double, from 137 million to 341 million.

So who counts as middle class?

According to organisations like the United Nations and the Organisation for Economic Co-operation and Development (OECD), it's someone who earns or spends $10 to $100 per day.

That's when you have disposable income and enough money to consume things like fridges, or think about buying a car.

As the UN suggests, the growth is being driven by industrialisation. The industrial revolution of the 19th Century transformed the economies of Britain, the US and Germany. The move from agrarian to industrial societies generated income rises that created the middle class.

Now it's the turn of emerging economies, particularly in Asia. In Indonesia, for instance, investment now exceeds 30% of GDP, a sign that there is more manufacturing.

How the new middle class is growing around the world

Much of the growth in the region is due to China. It is undergoing a re-industrialisation process. As the economy was industrialised in 1978 after decades of central planning, it is upgrading its industry, which has hastened the move out of agriculture.

The tough question is, why are the major changes happening now? For most of the post-war period, the surprise was why poorer countries didn't grow more quickly than rich ones.

Economic theory says that because they are further from the technology frontier, these countries can benefit from existing know-how, and thus can grow more quickly than rich ones, which grow only by innovating.

One of the reasons was hinted at by the Feldstein-Horioka paradox. The economists Martin Feldstein and Charles Horioka observed a positive correlation between national savings and national investment.

It's a paradox because, if capital truly flowed to where returns were greatest - it should go to low-stock countries because investment experiences diminishing returns. So, there shouldn't be a correlation.

It has helped to explain why investment and therefore know-how wasn't getting to developing countries - one of the reasons why they didn't "catch up".

But, there was a notable change in the early 1990s.

Richard Freeman of Harvard describes it as the "great doubling." The global labour force doubled to 3 billion people when China, India and Eastern Europe re-joined the world economy.

China's "open door" policy took off in 1992, India turned outward after a 1991 balance of payments crisis and communism fell in the Soviet Union.

Graph showing foreign direct investment

Those investment funds helped to generate the savings needed for emerging economies to industrialise. They also embodied the know-how that can help the catch-up process.

It is why the 2000s were the first time in which global GDP growth significantly outpaced the EU and US, and was driven increasingly by emerging economies.

Will the trend last?

One of the most remarkable feats in the world has been the lifting of about a billion people out of abject poverty in the past couple of decades.

If the industrialisation trend continues, then this century could witness some of the rapid improvements in living standards seen in the West during the 19th Century.

But, there are a number of challenges.

The UN notes that the new global middle class is likely to demand better environmental protection and more transparency in how government operates.

The importance of global integration is also why protectionism is warily watched by many.

The prize, which many will hope is in reach, is that global poverty is eliminated entirely within another couple of decades.

It is the reason why the Nobel Laureate Robert Lucas said that once you start thinking about economic growth and the improvements in standards of living, it is hard to stop.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    0

    Comment number 66.

    Interesting article. I am intrigued by the implications of the shrinking of the western middle class (eg in the UK, the middle class has been proleterianized into binge drinking and pop music moronity) and the rise of an educated and talented 3rd world middle class. A true shift in power, it seems.

  • rate this
    0

    Comment number 65.

    "Because they are further from the tech frontier, these countries can benefit from existing know-how, and thus can grow more quickly than rich ones, which grow only by innovating."

    Also they can leapfrog the "old infrastructure" problem: they don't have miles of copper cabling to rip out of the ground, or asbestos and lead piping and Victorian sewers; they can go straight to wireless and fibre...

  • rate this
    +1

    Comment number 64.

    Well I live in Brazil - $10 a day (20 reals) wont get you much at all - even at the $100 a day you wouldnt be close to middle class by Euro standards. There are so many stealth taxes and hidden charges here that us Europeans take for granted - take health care, dental treatment, school fees, school books, school transport, accountancy fees (yes-for the average Joe)+ different bureaucracy payments!

  • rate this
    0

    Comment number 63.

    CL @61
    Linda reports UN "historic shift", in global sum & distribution of "middle class", magnitude not since industrial revolution

    The goods of price-advantaged transnationals have driven domestic elites to export their capital, and dictators to open their borders to capital

    "Challenges" are noted to the implicit 'curve'. @56 you contribute foresight AND negativity: your 'curve'. @58, some hope

  • rate this
    +1

    Comment number 62.

    Dariusz Kowalczyk, senior economist with Credit Agricole-CIB in Hong Kong. said that the central bank was likely to announces a cut in the reserve ratio requirement (RRR), the amount of money that the banks are required to keep in reserve, to try and boost lending in the country. (BBC)

    And we do know what has happened in 2008 in US, etc. where banks were allowed to lower their liquidity.

  • rate this
    +1

    Comment number 61.

    58.All for All
    What are you talking about. This entry makes no sense at all

  • rate this
    +1

    Comment number 60.

    And re Chinese preference for industry versus agriculture.

    250 milion farmers forcefully moved without hukou (urban residency permits) which would entitle them to health care, insurance and their children to education - is a success?

    http://www.nytimes.com/2013/06/16/world/asia/chinas-great-uprooting-moving-250-million-into-cities.html?nl=todaysheadlines&emc=edit_th_20130616&_r=0

  • rate this
    +1

    Comment number 59.

    Linda Yeh: "Much of the growth is due to China"

    Acc. to recent reports most of the PRC growth data has been falsified by local officials who daren't report an economic slowdown. So even Chinese Politbureau doesn't know what the country's growth rate really is.

    " think about buying a car.".. Thinking about buying means nothing. E.g. thinking about buying Gullfstream 550 doesn't make one rich.

  • rate this
    -3

    Comment number 58.

    ChrisLondon @56
    behind curve'?
    Many curves, relentless or of comfort, in context: not even favourites to be relied on against 'possibilities denied': environmental & economic & social catastrophe; or sudden change 'of a troubled heart' - wherever it first happens - rapidly involving "the global middle class" of LInda's headline, perhaps thence in generous justice the masses & our highest Quislings

  • Comment number 57.

    All this user's posts have been removed.Why?

  • rate this
    +5

    Comment number 56.

    Linda; You appear to be behind the curve, this story is about five years late. It would be more appropriate to be asking what now for the pseudo middle class. As they now see their bright future slip away due to slowing of their economies. We are seeing unrest in the BRIC nations with only Russia showing any sign of resilience. Unrest in Brazil and India, inflation and declining output troubling!!

  • rate this
    -1

    Comment number 55.

    "The History of every major Galactic Civilization tends to pass through three distinct and recognizable phases, those of Survival, Inquiry and Sophistication, otherwise known as the How, Why, and Where phases. For instance, the first phase is characterized by the question 'How can we eat?' the second by the question 'Why do we eat?' and the third by the question 'Where shall we have lunch?”

  • rate this
    +2

    Comment number 54.

    I do not think that it is as simple as the reports makes out. Having a ever growing population is a massive problem because there will come a point where the world cannot produce enough food, jobs ,etc. The idea of a "young population" is BS because everyone gets older and older people still need food etc, and to be supported, so the problem just grows and grows.

  • rate this
    0

    Comment number 53.

    Dear @50.Piggyback . As I already said in another post. We shouldn't compare the money a Chinese get with UK's money. You have to see what that money will get for them. Offcourse a perseson getting 25,000 per year in china is super Rich. In China you can have full course lunch for 50p in a top restuarant, can you get that in UK?.

  • rate this
    0

    Comment number 52.

    The above is a rather linear portrayal of the global future with no regard to barriers in many emerging countries. For example, in the big player China, there is a caste-like household registration system which prevents rural-urban migrants from moving up socially. I invite Ms Yueh and readers to read my op-ed at http://www.eastasiaforum.org/2012/06/23/can-china-s-urbanisation-save-the-world/

  • rate this
    +2

    Comment number 51.

    also in that same article, mentions of Chinese buying more - but then listen foreign firms. General Motors, Starbucks, Burberry - are any Chinese brands selling to America and Britain en masse? I don't think I even know of any Chinese brands worth mentioning

    When we having British and American consumers clamouring for Chinese BRANDED goods, films (culture is also one sided), then we have parity

  • rate this
    0

    Comment number 50.

    BBC have another article on this - http://www.bbc.co.uk/news/business-22949602

    Zhang Min, is a hospital administrator (with his husband) earns £25,000 a year.

    "People who are more capable rise to the top. This is natural. It is the survival of the fittest."


    What arrogance!!! £25k and a lowly admin job is not "the top". I hope with rising living standards the Chinese don't become big headed

  • rate this
    0

    Comment number 49.

    And Canada's "Growth was primarily driven by strong performance in equity markets and real estate, and marginal GDP growth,"

    But they don't tell ya that many Canadian millionaires are lotto winners, they don't have time to spend their wealth because they need to work to make more money so they just go back to work and make more money that they will need for their future.

  • rate this
    -2

    Comment number 48.

    Times, they are a'changing faster than many can adjust. To be frank, Developing Nations are breaking through despite best efforts of Developed Nations to suppress, and until Developed can figure the 'How' it will continue.Those never-ending Military forays are acts of Desperation. Hopefully, an era of Serenity & Stability will follow, most People simply want to Live in Peace.

  • rate this
    +2

    Comment number 47.

    And now all those emerging countries mentioned are at a full stop or going backwards, for the reason the developed country's are standing still or going backwards, by being debt laden. The first can't do it without the "Other". In all the "BRICs" country's, growth is slowing down & then they're all iffy governments & within their ranks is much corruption. Protests, will visit them all in due time!

 

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