Monday, March 2, 2009

Middle class in emerging economies

The Pew Research Center and The Economist conducted a joint survey (full report here) on middle class attitudes on 16 issues like environment, democracy, religion, values, life satisfaction etc in thirteen emerging economies. The Economist has an informative survey that draws in from the aforementioned study and other materials to paint a largely optimistic picture of the burgeoning middle class in emerging economies. A few observations from both studies

1. Assuming an average earning per day of $10-100, it has been estimated that the middle class’s share of the whole world’s population rose from one-third to 57%between 1990 and 2006.

As the graphic below on China indicates, as economic growth gathered pace in the emerging economies, the middle class category has surged. In China, the middle class share of the population surged from 15% in 1990 to 62% in 2005, and in India it is projected by the NCAER to grow from 5% in 2005 20% by 2015 and over 40% by 2025. The same is true of other emerging economies.

2. Middle class are far more likely to describe themselves as being satisfied than are poor ones, far more likely than the poor to expect a better life in future, and "when they make it into the middle class, people in emerging markets want the kind of governance associated with rich nations".

3. The new middle classes contribute a lot to a country’s growth, efficiency and equity—as consumers, as investors in "human capital" and because they engage in a wider range of economic activities than the rich and are more likely to create jobs than the poor. The demands of middle-class consumers in the developing world feed investment in new sorts of production, which raises income levels and changes the way business is conducted. They also tend to promote liberalisation and, indirectly, democracy by moving their countries away from the politics of patronage.

Surjit Bhalla reckons that the larger a country’s middle class, the faster its economic growth - a nation’s growth rate rises by half a point every time the size of the middle class increases by ten percentage points. William Easterly estimates that countries will large middle class have "higher levels of income and growth... more human capital and infrastructure accumulation... better economic policies, more democracy, less political instability, a more ‘modern’ sectoral structure and more urbanisation." On his measurement, an increase of one standard deviation in the middle class’s share of national income is associated with one extra percentage point of growth per person.

4. As Daron Acemoglu (and here) and others have suggested, the middle class is more committed than the elite to a mixed, competitive economy. Unlike the elites, the middle class does not have a political monopoly to defend, and its members are therefore more willing to invest in businesses and technologies that might offer competition to the elite; they are also more likely to be open to the outside world. So middle-class growth, trade openness and new businesses tend to go together.

5. Though the causatory links between middle class and democracy are mixed, it is undeniable that a thriving middle class would be a welcome force in the emergence and sustenance of democracy. Its crucial feature of heterogeneity and wide range of interest groups and occupations - software engineers, shopkeepers, teachers etc - means that its influence on the political system is multi-dimensional and inclusive. As Acemoglu says, a heterogeneous middle class makes the elites less fearful of democracy than it would otherwise be. Further, in many areas like opposition to punitive taxation, support for property rights and contract laws, and stability in economic policy making, the elites and middle class sail in the same boat.

6. The middle class is committed to education or "human capital accumulation" - more children at school and university, higher educational qualifications, more adult education and healthier lives - and health care. They also have a gift for entrepreneurship - create employment and productivity growth for the rest of society, since it is more likely to invest in new businesses and more willing to learn new ways of doing things.

7. More than both the rich and poor, the middle class are likely to be affected by the global economic slowdown as they face problems across the board - jobs (its members are more likely than the poor to be employed by companies that depend on exports or outsourcing); assets (they have invested in property and shares but house prices and stockmarkets have crashed); and finance (they have put their money in banks or have borrowed from credit companies that are exposed to global markets). Further, since a large proportion of the middle class are at the marging of the transition, they are especially vulnerable to any economic slowdown that would lead to reduction in incomes. Martin Ravallion of the World Bank (who describes middle class as those with incomes in the range of $2-13 a day), estimates that in 2005 one person in six in emerging markets was living on $2-3 a day, and that in the 1990-2005 period, more than ten times as many people joined the $2-9 tier than the $9-13 tier of middle class.

The survey therefore feels that the middle class are more likely to be victims of the down turn than be the people to pull the global economy out of recession, as hoped by the likes of World Bank.

8. In a middle class "Modern Society", people hope their children will do better than they have done themselves; which believes in merit, not privilege; competition, not inheritance; thrift, not conspicuous consumption; and which applauds personal effort rather than collective endeavour. It is a society summed up by the words of Margaret Thatcher, "We were taught to work jolly hard. We were taught self-reliance. We were taught to live within our income", and whose critical characteristic, according to Justin Yifu Lin, the World Bank’s chief economist, is "aspiration, and the means to pursue it".

It is a society that has moved beyond the lowest two of Maslow's needs hierarchy - physiological needs of food and shelter, sex and sleep, and the basic needs of safety and security - and embraced the higher needs - "belonging needs" (love, acceptance, affiliation), "esteem needs" (self-respect, social status, the approval of others) and finally "self-actualisation".

9. The survey distinguishes between the middle class created by the actions of the state, containing managers and white-collar employees of state-owned enterprises, accountants and civil servants, and teachers and doctors in the public education and health systems, and its equivalent created by its own efforts in the private sector, covering private entrepreneurs, their employees and archetypal small shopkeepers.

Citing the examples of the first category middle class of Russia and the Middle East, it feels that the public-sector sort may not have the same entrepreneurial drive, political impact or capacity to sustain high economic growth over time as the private sector ones.

Here is a survey of the different approaches to estimating the middle class.

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