The Global Middle Class Is Bigger Than We Thought: A new way of measuring prosperity has enormous implications for geopolitics and economics

May 23, 2012

Foreign Policy:

The swelling middle class in emerging economies is transforming the economic balance of power across the globe. Measuring it, however, is no easy task. There is no widely accepted definition of what constitutes the middle class, and the most common ways of measuring its growth — through looking at rises in income — suffer from a number of flaws.

 There’s an easier way. In the developing world, buying a car is virtually synonymous with entry into the middle class. In these countries, car ownership separates those with the ability to purchase many other non essentials from those within the wider population. Car statistics, moreover, are generally reliable and frequently updated, and they include data by automobile type that can be used to further segment the middle class. For this reason, the number of passenger cars in circulation serves as the most reliable gauge we have about the size of a country’s middle class.Applying this measure significantly alters our understanding of the middle class in the developing world. It shows that there are many more affluent people in developing countries than had previously been thought and that about 70 developing countries with a combined population of about 4 billion are near or above the point where car ownership rises very rapidly. This suggests that very large numbers of people will enter the middle class in the coming years, transforming the economies and political systems of the countries they inhabit.

Just What Is the Middle Class, Anyway?

The middle class in the developing world is rising. The only question is how high it will go and how fast it will get there. About 85 percent of the world’s people live in developing countries, yet they accounted for only 18 percent of global consumer spending just a decade ago; today, they account for nearly 30 percent. Consumer spending in developing countries has been increasing at about three times the rate in advanced countries, and we’re not just seeing a growing demand for necessities, but also for middle-class staples such as meat, toothpaste, cell phones, and air-conditioners.

Measuring the global middle class isn’t just an academic exercise — its growth carries real-world implications. Political scientists are interested in the topic because a large middle class is associated with greater political awareness, desire for more accountable and representative government, and even demand for free markets. Economists and market analysts are mainly interested in the size of the middle class as an indicator of a population’s ability to rise from poverty and purchase items that go beyond bare necessities.

But here’s the problem: The world has never agreed on a universally accepted definition of what constitutes “middle class.” The broadest classification is too low; it suggests the middle class is anyone who is not poor, which according to the World Bank means those who earn an income in excess of $2 a day after adjusting for purchasing power. That level has now been achieved by more than 4 billion of the world’s 7 billion people, but while many people earning $2 a day are able to afford a cell phone, their income is far too low to afford amenities such as a regular power supply or clean water.

The narrowest classification defines middle class as individuals with an income close to or above the median income in advanced countries — roughly $85 a day at U.S. prices. Only about 12 percent of the world’s population lives in countries whose average per capita income is higher than that threshold, and only a very tiny minority in developing countries would qualify. This level of income, moreover, exceeds by a factor of seven the income needed to buy a car (around $4,000), not to mention most other big-ticket consumer items, indicating that the definition is far too narrow and too high.

Many other measures have been proposed in between these extremes. The most widely used measure was proposed in 2002 by World Bank economist Branko Milanovic and Hebrew University professor Shlomo Yitzhaki, who counted people with daily incomes between roughly $10 and $50 a day, after adjusted for purchasing-power parity, as middle class. If one uses this definition, there are an estimated 369 million people in the developing G-20 economies — Argentina, Brazil, China, India, Indonesia, Mexico, Russia, South Africa, and Turkey — who qualify as “middle class.”

Such income-based measures of the middle class suffer from a number of deficiencies, however. First, they are based on infrequently conducted household surveys, which vary enormously in quality. Second, incomes, even when adequately measured, do not directly reflect private consumption. The share of government spending as a proportion of GDP varies greatly across countries, for example, and households in different countries and at different levels of income exhibit very different savings behavior. (Think of poor and high-savings China at one end and the United States, which is rich and has a low savings rate, at the other).

Finally, comparing incomes across countries at different levels of development represents an enormous challenge. For example, one obviously cannot even afford the most basic food and shelter in the United States at $2 a day, the World Bank’s definition of non-poor. The United States places its poverty line at $13 a day, more than six times higher than the World Bank measure.

There’s a Better Way to Measure the Middle Class

It is obvious, then, that we need a better way of measuring the middle class. Here’s where the passenger cars come in. Cars are big-ticket items that indicate the ability and willingness to purchase many other nonessential goods. Indeed, while the vast majority of households own a car in advanced countries, in developing countries owning a car symbolizes relative affluence. While one can define the middle class in many ways, car ownership is an unambiguous indication of the ability to purchase other luxury goods.

Critics may contend that measuring car ownership excludes households that can afford, say, a computer, TV set, or air-conditioner, but not a car. However, because cars in circulation in the developing world are often of very old vintage — for example, the average passenger car in India is 20 years old, compared with 11 years in the United States — this supposed omission is not nearly as large as it seems. In the United States, for example, one can buy a 20-year-old Ford Taurus for about $500, about the price of a new computer or TV set. The older cars in circulation in developing countries can be bought for even less. So even for the purpose of assessing potential demand for many less expensive consumer products, the ability to buy a 20-year-old or a 30-year-old car provides a pretty good benchmark…

Read it all.

About these ads
Follow

Get every new post delivered to your Inbox.

Join 81 other followers

%d bloggers like this: