Global middle-class growth will drive the world economy

Today, the global middle class, numbering about 3.2 billion in 2016, may be considerably larger — by about 500 million people — than when I first attempted to estimate their size seven years ago.

Asian households, in particular, are now thought to be much richer, relatively speaking, than before. Indeed, the next decade could see a faster expansion of the middle class than at any other time in history.

Within a few years, a majority of the world’s population could have middle-class or rich lifestyles for the first time ever. The most dynamic segment of the global middle-class market is at the lower end of the scale, among new entrants with comparatively low per capita spending.

{mosads}In 2010, I published a set of projections suggesting that the emerging middle class in developing countries was about to surge. I argued further that demand from this segment of the market could drive global economic growth and partly offset lower demand among middle-class consumers in developed countries hit by the Great Recession.

In my latest research piece, “The unprecedented expansion of the global middle class: An update,” I find that, over the past seven years, four relevant developments have shaped middle-class calculations, and the first two of these have quantitatively important implications for overall estimates of trends and levels.

First, a survey of purchasing power parity (PPP) prices, conducted in 2011, has replaced the previous 2005 PPP survey (World Bank, 2015) as the basis for comparing real income levels across countries. The 2011 survey differs not just in updating price levels, but also uses a new methodology for generating country-level data.

The results have markedly changed and improved our understanding of countries’ and households’ relative economic strength. In brief, Asian and African countries were estimated to be far richer, compared to other countries, than previously imagined.

The second development pertains to continued weakness in global economic growth. Global recovery has disappointed, remaining weaker than the recovery from previous recessions (although perhaps in line with the rate of recovery from previous financial crises).

Major institutions have sequentially and continuously downgraded their growth forecasts. The hoped-for “green shoots” have not yet materialized.

Third, GDP data have improved. In some countries, (Nigeria is a good example) a rebasing of national accounts led to significant revisions of estimated output and national income.

Fourth, several new household surveys now make it possible to undertake a more up-to-date assessment of income distribution at a time of significant changes in within-country inequality, and, in some cases, allow for direct measurement of the middle class for the first time.

While global numbers tend to be driven by China and India, the middle-class expansion of the past few years has been heavily concentrated in Asia. The vast majority (88 percent) of the next billion people in the middle class will also be Asian.

Globally, the middle class is already spending $35 trillion (2011 PPP) annually, and could be spending $29 trillion more by 2030, accounting for roughly a third of projected GDP growth (in PPP terms).

The market for middle-class consumption could grow at an average rate of about 4 percent in the long-term. While this provides some impetus to the global econ­omy, it is not as large as the demand growth generated by middle-class spending in North America and Europe during the 1960s and 1970s, which exceeded 5 per­cent per year.

The global average masks two distinct groups of roughly comparable size. The middle-class market in advanced economies has matured and is projected to grow at only 0.5 to 1 percent per year, while the mid­dle-class market in emerging economies is far more dynamic and could register annual growth rates of 6 percent or more.

The changing distribution of middle-class spending toward new entrants will have an effect on markets. Households just entering the middle class will seek to purchase consumer durables, as well as services, including tourism, entertainment, health, education, and transport.

Growing middle-class spending will undoubtedly have an effect on carbon emissions, but the size depends on government policies. If cities are properly planned with energy-efficient buildings and mass transport, the carbon footprint of middle-class households will be reduced by perhaps 10 percent.

Equally, if aggressive campaigns are introduced to provide uni­versal secondary education to girls, then the total number of people in the world will be far smaller — 9 billion by 2100 instead of 11 billion. This follows from the simple arithmetic of demography — a woman who has completed secondary school has 4 to 5 fewer children than one with no education.

It will not be easy to generate support for the middle class, since, in world where populism is on the rise, the story of globalization can be distorted into a stark stand off between the middle class in emerging economies versus those in advanced econ­omies.

To counter this, a new package of “inclusive growth” policies must be constructed. It should be based on the common theme that con­tinued widening of income and opportunity inequality, and the barriers these create to social mobility, must be forcefully tackled while preserving the benefits af­forded by globalization and technological change and innovation.

Homi Kharas is a senior fellow and deputy director of the Global Economy and Development Program at The Brookings Institution.

The views expressed by contributors are their own and not the views of The Hill.