Saturday January 26, 2013
The emerging bourgeoisie
WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN
FOR Karl Marx, “the bourgeoisie... has played a most revolutionary part” in history. He is right. In the past two decades, the new middle-class (NMC) has surged forward, silently producing a revolution within emerging markets in wealth creation and in lifestyle. By and large, they are a product of growth.
Who are they?
There is no best definition of NMC; it all depends on what your objective is. US$2 a day is commonly accepted as the poverty line in developing nations. Beyond this, people join the middle-class in the sense they have moved out of poverty.
My old friend Homi Kharas (formerly with World Bank and now at Brookings, a US think-tank) once defined today's global NMC as households with disposable income (or daily expenditure) of US$10-US$100 a day (RM30-RM300) per person at 2005 purchasing power parity prices (that is, their domestic buying power at 2005 prices). Two recent reports tell their story: Global Trends 2030, just published by the Paris-based Institute for Security Studies (ISS) and Perspectives on Global Development 2012Social Cohesion in a Shifting World by OECD (the rich world's think-tank, also based in Paris). According to them, the NMC is global and on current trends, its members will rise from 2 billion today (split about 50:50 between developed and emerging nations) to almost 5 billion in 2030 (of an estimated world population by then of above 8 billion); among them, 3-4 billion are likely to live in emerging economies.
Viewed differently, for the first time in human history, more people will be part of the NMC than poor! No matter how one looks at this, the irrevocable redistribution of income and economic power is undeniable. China is the main driver of this change. ADB (Asian Development Bank) forecasts Chinese NMC will rise up to 80% of the population by 2030. India has similar potential, with as much as 300 million in the NMC today.
By definition, middle-class members are neither poor nor very rich sort of in-between. Middle-class, whether lower or upper, describes more than an income category it reflects a set of attitudes; indeed, a new lifestyle. A key characteristic is that they possess a reasonable amount of discretionary (spend at will) income: as a rule of thumb, people turn middle-class once they have about one-third of their income left for purposeful spending, after providing for basic food and shelter. This allows them not just to buy a house and durables (TV, car, fridge), improve health and leisure, but also plan for the future. Usually, this means having some form of employment with a predictable income stream and benefits. That's the second characteristic.
In practice, the 2009 special report by the Economist identifies two types of middle-class in emerging economies: (i) global-middle-class who by any standard carry recognisable hallmarks of being middle-class they have confidently made it and are fast growing but account for only 10%-15% of emerging world; (ii) developing-middle-class (loosely aka lower middle class) who have just made it and are more numerous; they are recognised as such but by evolving standards of the developing world and are not as rich as (i); they have grown very fast and are now 60% of world population, against only 30% in 1990.
The NMC are not really a coherent, homogeneous group they vary even from place to place, yet are recognisable by most standards as being middle-class. This heterogeneity distinguishes them.
For another, the NMC don't grow incrementally, unlike the process of economic growth. Empirical evidence from World Bank studies show that in 1980, there was hardly a middle-class in the developing world (including China). With sustained economic growth, incomes rise and they move hurriedly towards the annual income threshold (US$3,500-US$4,000 per person) and before you know it, vast numbers cross into middle-class. This shift in income distribution was most evident between 1990 and 2005 in China. Once past a certain stage, it surges. During this period, Chinese NMC share of population soared from 15% to 62%. This is only being reached in India at the end of 2000s.
Kharas characterises this mass cross-over as the “sweet spot of growth” when developing nations reap maximum benefit from utilising cheap labour through expanding global demand and trade. But the process slackens as they price themselves out of world markets. It also marks the period of rapid urbanisation when under-employed farmers abandon what Marx called “the idiocy of rural life” to work in manufacturing nearby urban areas. They soon become NMC sitting somewhere between rich elite and rural poor. Their numbers are expected to double by 2030 with profound social consequences. Marx wrote in the Communist Manifesto: “...The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communications, draws all, even the most barbarian, nations into civilisation.”
As income of NMC rises, spending habits change. In a 2012 study, HSBC Global Research concluded: “Two things stand out, viz impact of the “threshold effect” and the massive rise in discretionary spending...” as personal annual incomes rise from below US$1,000 to between the US$3,000 and 5,000 threshold. The “S-curve” effect quickly sets in, demand radically changes and thereafter beyond a certain income, behaviour tends to moderate to become more incremental. China, India, Indonesia and Russia all went through this process. The NMC acquire new (often bad) habits: consequently, spending on (i) basic food falls from 40% of total income to 10%, (ii) meat, fish and dairy rises, (iii) alcohol, drinks and tobacco also rises, (iv) fuel to power a more comfortable living goes up, (v) health, social protection and financial services get higher priority (from 5% to 15%).This significant shift triggers the development of a vast array of new services and service providers. Over time, as demonstrated in China, India and Brazil, discretionary spending picks up markedly (as income rises further), especially on “cooked food” (restaurants), clothing and footwear (shopping) as well as on travel, recreation & personal care all growing at high multiples. Consistent with massive transformation, emerging markets' NMC are expected to buy up to 55% of all audiovisual, photographic, and communication & computing equipment in 2050, from 24% today.
The current wave of protests and demonstrations (stretching from Middle East to Hong Kong and South Korea to Brazil) reflect just the beginning of this trend. For the NMC, fostering cohesive societies holds the key to achieving their dreams. Indeed, the rise of global NMC is already transforming the world's social, political and economic landscape. Overall, NMC will demand more & better public services, a fairer division of growth's benefits, and more responsible political institutions. As I see it, what's happening today suggests that the wealthier and more educated they become, the NMC increasingly identify and bond with a broad set of universal values. This political awakening has begun to ferment. To stabilise this process, I think four key issues need to be addressed: (a) institute more extensive social protection; (b) create more and better jobs; these are desperately needed especially in states like Greece and Spain where youth unemployment reached 57%; (c) formulate a robust social contract calling for better delivery of public services and greater government accountability; and (d) provide more private “space” for citizens especially NMC to exercise their voice, including more extensive role for social media.
NMC and growth
NMC make distinctive contributions to the growth process. First, NMC are committed to education. Human capital accumulation is vital to the growth process. This means more kids at school and university and more adult continuing education.
Education remains high on the agenda of NMC values, more so than the poor or even the rich. Second, NMC spend proportionately more on their children's education. Part of their extra spending goes to keep children longer at school and increasingly, they do not take their children out of school to work. The same commitment is made in health and personal care as NMC desire healthier lives. Third, NMC contribute to entrepreneurship. Indeed, new entrepreneurs readily emerge to create employment and contribute to productivity growth. They are more likely to invest in new businesses & more willing to learn new ways of doing things. As a class group, they are known to produce both a mass of hard-working business people and some exceptional entrepreneurs.
Above all, NMC can act as a moderating influence on social conflicts that can help restart growth. By definition, a growing middle-class can act to reduce income inequality because they can moderate the stark divide between rich elite and rural poor that is so often a source of conflict. NMC also tend to be inclusive, which is good for growth.
Scary new rich
Unfortunately, rising incomes often do not yield shared values. Newsweek calls the emerging bourgeoisie “a patchwork of contradictions.” Rather scary, I think as they are known to behave differently: clamorous but seldom confrontational politically; support globalisation yet highly nationalistic; proudly upward-mobile but fearful of falling back; fiercely individualistic yet still rely on government patronage; often socially conservative and supportive of powers that be so long as they deliver the spoils of growth. The 2009 Pew study showed that the NMC are often prepared to give up their ideals for prosperity; indeed, most are politically risk-adverse. In Brazil and Russia, the NMC are more worried about “freedom from hunger than freedom of speech.”
In Malaysia, Turkey and Indonesia, much of the NMC are devout Muslims who do choose to vote wearing Islamic headscarves. The NMC are often psychologically driven by an odd mix of individualism & insecurity. In China, India and Russia, they became NMC the hard way. Nearly 30% of Brazil's NMC owes its livelihood to the “grey” market, where income is irregular & social safety nets non-existent. For most, they are unsure how sustainable the new status is going to be.
What, then, are we to do?
Transformative power is the hallmark of NMC. Within the last 30 years a world that was predominately poor is now mostly middle-class. Rising wealth is unlikely to replace cultural and national identities. It may even reinforce them.
Not surprisingly, the transformation is set to be most pronounced in Asia. China already has more than 180 million NMC consumers, second only to the US. But they represent less than 15% of the Chinese population. By 2030, the ISS projects this ratio to rise to 75%-80%. On the back of growing pay checks, China's retail sales rose 17% in 2011. Consumption is expected to make-up 45% of GDP by 2015 (up from 15% in early 1990s). By 2030, as much as one-half of India could cross the threshold to become middle-class. This tide goes beyond Asia.
ISS estimates more than two-thirds of Brazilians are likely to become middle-class by 2030; by then, Central and Latin America can have as many middle-class consumers as North America. The process will take more time to come to pass in Africa. Even there, the numbers will more than double by 2030. Sure, this new group of consumers will still total much less in disposable income than their North American and European counterparts. But the rich nations' share of global middle-class consumption is likely to fall, by more than one-half from 64% to 30% by 2030.
The Chinese buy more cars than Americans did since 2009. Already, the Arab spring suggests that existing and authoritarian elites will come increasingly under strong pressure. Transformative change will come NMC demands it, amplified by widening access to education (especially for women) and by the impact of digital revolution. Internet users in China and India already far exceeded those in US. Will growth be more stable and sustainable, or can the world become more peaceful?
No one knows for sure how this will finally play out; or how the gap between NMC expectations (with its new “fire-power”) and lack of political will of states to act, can be bridged. Whatever the outcome, the increasingly more affluent NMC won't let go! Transformative power remains in their hands.
Former banker, Dr Lin is a Harvard-educated economist and British Chartered Scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: firstname.lastname@example.org.